We're Still Digging Rio Tinto Here's Why

Small Chinese banks are the weak link in the Chinese financial system, according to the FT's Lex column:

Who's hot and who's not? The Chinese Communist party is set to find out in a leadership reshuffle next month.

Chinese regulators are already sorting sheep from goats. The result, according to a report from Fitch, is a financial system that is broadly safer, but where

risks are steep among smaller lenders.

The authorities are making progress in curbing risky short-term funding. Fitch found the outstanding balance of such loans

has fallen for the first time in 10 years. The share of issuance with maturities of up to three months has declined to 49 per cent of the total. But smaller banks and finance groups are becoming

increasingly reliant on this form of financing.

Mid-tier lenders get 43 per cent of their funding from short-term sources; big state-owned banks receive only a fifth.

Demand for deposits has been strong because credit growth has outstripped GDP. The ratio of deposits to loans has declined 9 per cent to 61 per cent since the end of 2013.

State-backed money has helped ease the pressure as regulators start cleaning up grubbier corners of the system.

Loans to Chinese banks from the People's Bank of China quintupled to Rmb9tn ($1.4tn) in the three years to July. Non-bank financial institutions and big state banks, such as the Industrial and Commercial Bank of China with its large rural deposit basis,

have also injected liquidity.

Analysts at UBS reckon banks in the north-east, with its heavy industrial base, could be most affected by rule changes. Foreign investors are unlikely to lose much sleep: riskier lenders such as Shengjing Bank and Baoshang Bank are hardly household names.

Prophets of a Chinese banking crisis have been wrong, so far. Lenders are supported by strong deposits and an agile central bank. At a pinch, reserve requirements of 17 per cent of deposits could be lowered if liquidity falters. But the clean-up is delivering the same message to smaller lenders that some unhappy party cadres will receive next month: you are the weakest link.

Source : http://www.smh.com.au/business/markets-live/markets-live-waiting-for-jobs-20170913-gyh0sx.html

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