Risks rising for China’s city commercial banks
Growing investment holdings, waning liquidity, weakened capital buffers and local government influence increasing vulnerability, says Fitch Ratings
City commercial banks across China are increasingly relying on interbank funding and wealth management products as deposit substitutes– but growing investment holdings, waning liquidity and weakened capital buffers have rendered them more vulnerable to financial disruption, according to analysts at Fitch Ratings.
The group of lenders have grown rapidly in the last few years, says a latest study from the ratings agency, with their market share doubling to 12 per cent of system assets at the end of 2016, from around 6 per cent at the end of 2006.
Nonetheless, “their rising systemic importance implies any excessive risk build-up in this sector could lead to higher overall systemic risk”, said Fitch analysts Katie Chen and Grace Wu.
Much like mid-tier lenders, city commercial banks have shifted more assets into less-liquid, non-loan financial products, to enhance yield.
“There is a strong desire to seek higher investment yields, as loan yields have declined given the interest rate cuts,” Chen and Wu said.
