Baoshang Failure Takes A Toll In China’s Interbank Markets As Contagion Fears Grow | 9/8/2018 | Staff
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SHANGHAI (Reuters) – Nearly three weeks after Chinese regulators took over troubled Baoshang Bank, a mid-sized mutual fund house in Beijing suddenly became unable to borrow cash in the interbank market and was forced to default on some products.

Around the same time, Great Wall West China Bank, a regional lender in Sichuan province, set out to sell negotiable certificates of deposit (NCDs) – usually a routine fundraising tool for small lenders – but was only able to raise a tenth of its targeted amount.

Examples - Distrust - China - Interbank - Market

Both examples highlight increasing distrust in China’s interbank market as smaller banks, asset managers and brokerages find their creditworthiness questioned in the wake of the takeover of Inner Mongolia-based Baoshang.

Fund managers and traders say they are worried about the prospect of further defaults in interbank borrowing as well as more troubled banks coming to light.

Saying - Cockroach - Swarm - Liu - Haiying

“As the old saying goes, when you see one cockroach, you will discover a swarm of them,” said Liu Haiying, founder of Shanghai-based Haiying Investment and author of the book “China’s Huge Debts”.

“Worryingly, Baoshang Bank is likely that first cockroach.”

Market - Government - Decision - Principal - Interbank

Particularly shocking for the market has been the government’s decision to only guarantee the principal for interbank deposits with Baoshang worth 50 million yuan ($7.3 million) or less, shattering a widely held belief in full government guarantees for such assets.

Short-term interbank lending rates have spiked to as high as 15% this month from more normal levels of around 3.5%.

Liquidity - Stress - Concerns - Insolvency - Liu

“The liquidity stress we’re witnessing now is rooted in concerns over insolvency, which is very difficult to cope with,” said Liu, adding that while authorities were right to try to clean up problems, they risked creating chaos in the financial system.

Many small lenders rely on short-term borrowings for long-term investments and surging financing costs could hit their returns or force them to liquidate assets. That in...
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