As China Orders Its Smaller Banks To Load Up On Cash, Is The Biggest Ever “Unlimited QE” About To Be Unleashed?

The Chinese new year may be over which, following a last minute bailout of its insolvent Credit Equals Gold Trust product, was largely uneventful. But already concerns about domestic liquidity are once again rising to the surface following reports that China’s banking regulator ordered some of the nation’s smaller lenders to set aside more funds to avoid a cash shortfall, which as Bloomberg notes, signal rising concern that defaults may climb.

Specifically, “China Banking Regulatory Commission branches asked some city commercial banks and rural lenders to strengthen liquidity management this year, the people said, asking not to be named as the matter is confidential. Different requirements are being instituted by province, such as quarterly stress tests, after CBRC studies last year showed increasing risks at those lenders, the people said.”

“Smaller banks are the weakest link of China’s financial system because their lack of a stable deposit base would force them to seek more expensive funding and offer more risky loans,” said Liu Jun, a Wuhan-based analyst at Changjiang Securities Co. “They will be hardest hit when borrowing costs are elevated and the economy slows.”

The CBRC action was to be expected in the aftermath of news throughout last year, confirming that China’s bad debt demons will soon be in need of a violent exorcism: “The requirements add to steps taken to protect against soured loans weighing on China’s economy, which included speeding up bad-loan writeoffs and limiting local government debt sales.“

Recall that as we reported previously in Big Trouble In Massive China, total losses from bad debt discharges could rise to a mind-boggling $3 trillion which would once and for all settle any debate about just how hard or soft China’s “landing” (or is that lending?) would be: “The nation might face credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years, particularly by non-bank lenders such as trusts, exceeding that seen prior to other credit crises, Goldman Sachs Group Inc. estimated in August.”