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China tells big lenders not to shun small non-banks after Baoshang's woes

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BEIJING (Reuters) – China’s securities watchdog has told several large non-bank financial institutions to lend more to smaller non-bank institutions in the interbank market to ease a liquidity crunch, sources with direct knowledge of the matter told Reuters on Monday.

China’s money markets were rattled after regulators took control of Inner Mongolia-based Baoshang Bank on May 24 due to “serious” credit risks.

As a result, the central bank injected has cash into the banking system to reassure lenders, and regulators have repeatedly downplayed the risks at small financial institutions.

Yet some smaller non-banking institutions still suffered a liquidity crunch last week after being denied loans in the interbank market, traders said. China’s seven day and 14-day pledged repurchase rates both surged above 6% last Wednesday from below 4% a week earlier.

During a meeting on Sunday, Li Chao, vice chairman of China Securities Regulatory Commission (CSRC), urged large non-bank institutions not to cut off smaller non-banks as counterparties in the interbank market.

Managers from seven major securities firms and two fund companies attended the meeting in Beijing, the four sources said.

According to the minutes, confirmed by the sources, Li also told them to increase their lending quota for short-term bonds and offer more financing tools to support small securities firms.

Regulators also eased rules that would allow select brokerages to issue debt more easily, and said China’s top five lenders would provide funding support to the country’s top five brokerages.

The minutes showed that regulators are aware that the risk of illiquidity in the bond market had spread to non-banks, and that there was a rising sense of “distrust” between financial institutions following Baoshang’s takeover.

CSRC did not immediately respond to a fax request by Reuters seeking comment.

The moves to head off potential instability among smaller financial institutions comes as Beijing faces pressure to boost bank lending to help cushion the economic impact from the higher tariffs on Chinese imports imposed by the United States.

Although small banks and other lenders are not by themselves seen as a systemic financial risk, the concern is that enough of them have largely funded themselves via short-term money market borrowing, posing a collective danger if one or two fail.

(Reporting by Cheng Leng, Samuel Shen, Xiaochong Zhang and Ryan Woo; Editing by Simon Cameron-Moore)

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