Signs of more hands-off hands-on tack on defaults

May 12, 2014 10:52
A total of US$420 billion worth of investment trusts is due for redemption on the mainland this year, according to some estimates. Photo: Bloomberg

The mainland could let more credit defaults play out later this year with the central government appearing to grow more tolerant of the failures, the Hong Kong Economic Journal reported Monday, citing Christine Kuo, vice president at Moody's Investors Service Hong Kong Ltd., in an exclusive interview.

But, Beijing will probably step in if any events threaten to cause turbulence in the financial system.

A total of US$420 billion worth of investment trusts is due for redemption this year, according to estimates by some brokerages, with most maturing in the third quarter.

Given a general maturity of two to three years, an average of one-third of all such investment trusts expire on the mainland each year, Kuo said.

There is also the added squeeze on liquidity looming next month as lenders submit their quarterly capital assessment reviews.

Yet, there is no sign from the central bank that it will tighten growth in social aggregate financing to cushion to the cash needs for redemption, Kuo said, even though it has used short-term liquidity operations this year to boost supply.

The rating agency forecast that even if the non-performing loan ratio rises from the present 1 percent on average to 5 percent in the worst scenario, the tier-one capital adequacy ratio of the five largest banks will only drop by less than 1 percentage point. Meanwhile, local governments are expected to intervene to stave off any collapses in the real estate sector, which would be a key credit risk to lenders.

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