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China Receives Another Financial Warning

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China receives another credit indicator, which serves as a financial warning for the country. According to S&P Global Ratings, the adjusted loan-to-deposit ratio increased by 80 percent as of June 30. The ratio is inclusive of banking system’s capability to brave out challenges and a diversity of off-balance sheet items. S&P estimates that the ratio for some smaller lenders had already reached 100 percent.

The adjusted measure of the global ratings is increasing quickly than the standard ratio of loan-to-deposit as financial firms also stack into lending of off-balance sheets. The banks tend to side step the efforts of the government to harness returns in credit. Within a few years, the total credits at present could overcome deposits on a set basis. S&P stated that this would provide China an allowance to annul financial crisis.

China Receives Another Financial Warning

Source: Bloomberg

China’s ratio is still lower compared to other countries despite S&P adjustments. Liao Qiang, S&P’s Beijing-based Director, stated that the rapid loan growth, increasing bad borrowings, and reduced return on credit mix to make deposits essential fender to future financial challenges.

China’s banking system developed a cornerstone with the help of deposits as it grew along with the economy. Consequently, lenders were given a cost accumulation base that is low-priced and stabilized that also supports credit growth. China has the highest level of bank deposits from companies and households with a value of $22 trillion. This made lenders less reliant on wholesale funding in a short period compared to other financial institutions.

The world’s second largest economy implemented a loan-limiting cap to 75 percent of the deposits at the maximum. This was done for 20 years and became a part of risk-containing measures. In October 2015, this level was removed because it was seen as an encourager of hoarding illicit deposits and displacing loans from the balance sheets. By September-end, the Chinese lenders’ standard loan-to-deposit ratio remained at 67 percent. This is a slight increase from 66 percent when the ceiling was removed.

Chinese banks, particularly small and mid-sized firms, sold wealth management or savings-like products and offered shadow lending. As a result, the measure became more irrelevant. These offerings are not carried on the balance sheets. Based on China’s 50 largest banks, the S&P adjusted ratio recorded a swing to 70 percent in 2013. This measure increased by 10 percentage points in the next two years.

China Receives Another Financial Warning

Source: Bloomberg

The global ratings came up with adjusted ratio by considering loan-like assets and investments of company bonds on financial firms’ balance sheets. This is also inclusive of treating corporate credit as loans, particularly those off the balance sheets. On the formula’s other part, deposits are inclusive of wealth management products.

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