Salient to Investors:

Borrowing costs for Chinese banks have surged the most in at least 6 years.

Three of the largest rating agencies warn that banks may run out of cash to pay investors in their wealth management products and to extend new loans, increasing the risk their customers will default. Fitch Ratings said the People’s Bank of China is seeking to wring speculative lending out of the system after total credit approached 200 percent of GDP

Bad loans at banks have increased for 6 straight quarters through March 31, the longest streak in at least 9 years.

Charlene Chu at Fitch said Chinese commercial banks’ outstanding non-performing loan figures don’t reflect the real amount of debt because of the ways banks move loans off their books.

Moody’s Investors Service warned non-performing loans may rise faster as weaker borrowers have difficulty refinancing credit in the coming months.

Citic Securities said shadow lending flourishes in China because an estimated 97 percent of its 42 million small businesses can’t get bank loans and savers are seeking higher returns.  JPMorgan Chase estimates the industry may be valued at 69 percent of GDP.

Michael Pettis, a finance professor at Peking University said the problem is that when debt levels are so high, and more debt keeps the existing debt afloat, you absolutely have to stop the process, but it is very difficult to do so in an orderly way.

Stephen Green at Standard Chartered said over the next half-year credit growth overall will slow a bit.

Bank of America Merrill Lynch said no policy maker can afford to be blamed for being responsible for an unnecessary, fully avoidable financial meltdown and growth hard landing.

Zhou Hao at Australia & New Zealand Banking said smaller banks short of deposits will face significant pressure from liquidity management, and if the weakest link breaks, the likelihood of creating systemic risks increases.

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