We are launching a new monthly analysis of China’s banking industry, working with our analysts in China. In this issue, we interviewed local bankers and discovered doubts that China can sustain currency controls. We also look at flow data, which suggest that loan repayment has been important for the currency at least until the end of 2015.
Interviews – Capital Controls Will Fade
Our interviews with local traders, economists and bankers suggest Beijing’s tighter controls on capital flight are unlikely to last. These controls have been effective in February/March at the expense of normal business activity. We also outline five possible policy choices for the RMB below.
Analysis – Declining Overseas Borrowing
There is significant confusion over the composition in the decline of China’s foreign currency reserves. Is the decline due to false trade invoicing, service flows, or other factors? We think the data suggests that reduced overseas borrowing by Chinese corporates is a significant contributor to the decline.
Liquidity Watch – Rise in Interbank Lending.
Interbank loans and reverse repos continue to rise, driven by high demand for credit between institutions. The largest consumer of loans continues to be the corporate sector, whose loans grew 14.9%. However, the biggest jump in credit occurred with “other” financial institutions, whose loans rose 79.2% YoY. Clearly interbank lending has shifted from unregulated “entrusted” loans, to the more regulated interbank sector.