BOLLA CINESE: il concetto di “libero mercato” è un’altra cosa

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With the opening up of capital items and an increasingly internationalized renminbi (RMB), and particularly when the Shanghai Free Trade Zone (SFTZ) begins implementing policies which make investing and financing more convenient, foreign Investors and Financiers will have easier access to RMB.

However, this will increase the risk of RMB speculation by international funds through the SFTZ.

China’s current exchange rate regime, a managed floating exchange system, is adjusted with reference to a currency basket based on market demand, and PBoC conducts timely transactions between the RMB and foreign currencies in the Public market.

When forex capital flows in on a large scale, PBoC buys the foreign currency and introduces RMB into circulation. When large amounts of forex capital flow out, PBoC buys RMB using its foreign currency reserve to inhibit the depreciation of the RMB and the flight of capital.

“The Renminbi off-shore market and cross-border capital flows”

If PBoC fails to regulate in a timely manner or cannot control the situation due to lack of foreign currency reserve, the RMB could see significant depreciation within a short period, causing chaos in the foreign currency market, even triggering a monetary or financial crisis and affecting the development of the entire economy.

With the increasing convertibility of RMB capital items, short-term interest arbitrage may possibly flow into China’s monetary and capital markets – such as stock, bond and foreign exchange markets – where high returns can easily be obtained, forming a temporary false prosperity in bond and foreign currency markets and even the whole economy.

They can exploit legal loopholes to control the market with speculation, or even enlarge the amount of funds by taking advantage of financial derivatives’ leverage effect, which will impact the RMB and capital market.

If the stock index and RMB exchange rate rapidly declined as a result of the shorting mechanism used by international Speculators, the financial system and its stability would be seriously impacted and threatened.

Interest rate liberalization has challenged Commercial Banks, forcing them to adopt a series of measures to off-set the impact brought by the interest rate liberalization. Liability costs are increasing and deposits are draining.

The table

“China banking sector – Commercial Banks under the impact of interests rate liberalization”

shows the deposit interest rates offered by 16 listed Banks as at the end of May 2015.

Although PBoC has allowed financial institutions to take deposits at interest rates 50% above the official benchmark, none of these Banks offers the highest interest rates allowed.

The interest rates offered by the five state-owned Banks are basically at the same level, except for the interest rates offered by China Construction Bank (CCB) for deposits due within one year, which are higher than those offered by the other four.

The deposit interest rates offered by joint stock Commercial Banks are generally higher than those offered by the five State-owned Banks but lower than those offered by Urban Commercial Banks. In addition, the interest rates offered by joint stock Banks are more or less the same.

The deposit interest rates offered by Urban Commercial Banks are higher than those offered by other Banks. Increases in deposit interest rates lead to increasing costs of liability. Bank of Communications (BCM) even recorded negative growth in its deposits taken.

A diversified liability structure can help Banks cope with the pressure brought by the increasing costs of liability.

Commercial Banks’ sources of funds consist of deposits, debt securities issued, due to PBoC, due to Central Banks and other financial institutions, other liabilities, and owner’s equity.

Deposits which belong to passive liabilities have always been the core source of funds of China’s Banks.

With interest rate liberalization, active liabilities have become Commercial Banks’ important sources of funds and an effective means of Financial Management.

Active liabilities include:

l- debt securities issued,

l- amount due to Central Banks,

l- amount due to Banks and other Financial Institutions,

l- other new capital instruments such as agreement deposits.

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