Maturity transformation is the bread and butter of bank treasury departments. Treasury operatives balance the vast sums of deposits and loans on a bank balance sheet in a manner to ensure liquidity. There is always the risk of a run on the bank. But global banking regulations have been tightened since the GFC to ensure banks hold more liquidity and are thus more able to cope with market dislocations.
But, what is true of banks is not necessarily true of all listed investment vehicles, as investors in the six British property trusts, which halted redemptions over the past week, are learning. Those investors are being taught the lesson that the maturity mismatch between assets and liabilities means liquidity problems can surface if too many investors ask for their cash back at once.
That means £13 billion of UK property investments have now been locked in, as investors scramble at the same time to pull out cash out in the wake of the Brexit vote.
Yet while the focus is on Britain’s financial system in the wake of Brexit and fears grow that we could be at the start of a 2007 style liquidity reduction across global markets China has quietly amassed a $US24 trillion maturity miss match in its shadow banking system.
Bloomberg’s Tom Orlik reported that this “rollover risk” has emerged because “in 2015, China’s financial firms raised 158.4 trillion yuan ($24 trillion) — equal to about 230% of GDP — by issuing wealth-management products (WMPs)”.
Our own Linette Lopez recently covered research from HSBC and likened these WMP’s to weapons of financial mass destruction.
HSBC said that WMP’s are growing substantially faster than overall M2 growth in the banking system.
The bank said, “What that means, quite simply, is that money is flowing into WMPs faster than the pace at which it is being created, implying that liquidity is being sucked in from the real economy”.
“In our opinion, the sustainability of such a situation is questionable, and this is potentially one of the key factors that could trigger a systemic risk event down the road” they added.
Bloomberg’s Orlik says the money is going into sectors of the Chinese economy with the highest risk. “Construction, infrastructure, real estate, transportation, power and coal mining account for more than 50% of final borrowers in 2015.”
Again like UK property trusts the investors placing the hot money that is flowing into the WMPs funding projects in these sectors may not recognise the maturity miss match between the long term nature of the projects and the short-term nature of the rollovers in the WMPs funding them.
With such a massive amount of WMPs rolling trust and confidence in the system is essential. Chinese officials will naturally do everything in their power to manage any problems that may arise in the economy and sectors that will impact on these WMPs.
But as the collapse in the Chinese stock market showed last year confidence is fragile when investors are not committed to the products they are investing in but only the returns they are getting.
One piece of good news from this however is that it is likely to concentrate the mind of policy makers on keeping Chinese growth as strong as possible. And that, incongruously given the reason, could actually be a positive for global markets as strong Chinese growth acts as a dampener to western economic volatility.