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Chinese banks will face difficulties in wave of reform 

June 2, 2016

Alun John, South China Morning Post

While analysts have welcomed the apparent shift in Chinese policy towards structural economic reform, it could in the short term lead to rising liquidity and credit risks that are problematic for banks.

A credit risk is the chance of defaults by borrowers, while liquidity risk is the danger of being unable to buy or sell an investment as quickly as needed. In the broader economy, a liquidity crunch is a situation when it becomes more difficult to obtain external financing, making it hard for companies to meet their short-term obligations and potentially leading back to credit risks.

The much-referenced interview with ‘an authoritative person’ in the People’s Daily newspaper — a mouthpiece for the Chinese Communist Party — published on May 9 strongly indicated that policy makers are shifting from a ‘pro growth’ stance to one of ‘structural reform’. This is already starting to be seen in the figures, such as total social financing (TSF) data, a measure loosely designed to show the amount of money in the Chinese economy, which declined significantly in April, falling 68 per cent month-on-month and 29 per cent year-on-year. Read more

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