China's biggest lenders poised for windfall from rising rates

Beijing

AS China ramps up its quest to conquer leverage, the banking sector is finding out that being a big fish pays - literally.

While smaller lenders grapple with soaring money-market rates - some are said to have defaulted amid the tight liquidity - their larger counterparts are poised for a windfall. Bigger banks are benefiting from higher borrowing costs given their status as net lenders in the interbank market, a situation that has Citigroup Inc to Morgan Stanley favouring their shares. Large bank stocks have already returned double that of their smaller brethren so far this year.

"Investors can long big banks, while shorting the small ones," said Hao Hong, chief strategist in Hong Kong at Bocom International Holdings Co, a brokerage owned by Shanghai-based Bank of Communications Co, a medium-sized bank. "Large lenders might be secretly happy at what…