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Chinese deleveraging policy could weigh on banks' capital and liquidity

China's banking sector showed a change in its growth pattern due to the government's push for deleveraging, S&P Global ratings said in a commentary.

The nation's overnight interbank repurchase rate jumped 75 basis points to 2.85% in the first eight months of the year, while the banking sector's asset expansion slowed to 5.5% from a 15.2% average in the preceding five years.

The rating agency said this shift reflected the country's change in policy choice from "easy money, loose credit" to "tight/neutral money, loose credit."

Chinese financial markets were unstable in the first half of the year due to higher and volatile interbank rates, coupled with regulatory pressures on banks' short-term, on- and off-balance sheet wholesale funding, S&P said. It believed that banks will experience more significant capital pressures and liquidity challenges over the next two years.

"While the banks' borrowing costs may have plateaued, interest rates for corporate and personal loans could go up further as banks gradually pass along their higher costs and loan growth continues to outpace deposit growth," it added.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.