Rise In Funding Cost Poses Risks To Auto Sector Players
BMI View : Should the recent rise in funding costs due to the Chinese banking sector's woes flare up once more, small dealerships which already need to grapple with tight cash flows will come under greater pressure, potentially forcing many of them to shutter. Domestic carmakers which have seen a surge in accounts receivables would also see a detrimental impact to their balance sheets and should they shelve expansion plans due to more expensive financing, auto sales would be indirectly hurt.
The recent turbulence in the Chinese banking system saw overnight interbank borrowing rates soaring beyond 30% ( see 'Beijing's Credit Crunch Conundrum', June 20). While rates have fallen since then as the central bank stepped in to ease the credit crunch in the banking system, they still remain elevated compared with the more benign environment before the liquidity squeeze. The accompanying chart highlights the rise in interest rates, showcasing the upward shift of the swap curve from May 1 2013 (before the banking sector crunch) and July 8 2013 (today).
Moreover, the risk of a further flare-up remains ever-present given the precarious health of the banking system. In this article, we look at such a scenario and examine the impact to the auto sector supply chain.
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