Risks flagged as Chinese banks dodge loan quotas
BEIJING: Chinese banks are showing themselves to be Artful Dodgers of official quotas on bank lending intended to cool down the economy - and this trend of masking loans could heighten risk in China, analysts point out.
Despite official rhetoric from authorities that an avalanche of new bank loans - which have fuelled asset price bubbles and stoked inflation - is being reined in, China's credit growth this year hasn't slowed materially from 2009, a special report from Fitch Ratings has observed.
"Talk of a substantial slowdown in credit growth in China is premature," noted Charlene Chu, head of Fitch's financial institution ratings in China. "In reality, lending has not moderated, it has been diverted into other channels."
According to Chu, Chinese banks have proved inventive in hiding new loans through a variety of devices.
One very successful method was to camouflage the amount of loans they make by holding discounted bills. Chinese banks, the report notes, have been offloading trillions of yuan in loans in 2010 by artificially reducing their holdings of discounted bills. By the rating agency's estimate, Chinese banks understated the balance of discounted bills by as much as 1.6 trillion yuan (or about $250 billion) at the end of the third quarter. Alternatively, instead of buying discounted bills, banks issue fresh acceptances collateralised by the original commitments to pay up - but this, the report notes, heightens systemic risk by creating a complex web in which payment for any one transaction may be dependent on an unrelated deal involving different counterparties altogether. Additionally, Chinese banks have been shifting loans off their balance sheets and repackaging them into structured investment products for sale to investors. Given the paucity of investment products, and the negative real interest rate on deposits, such risky propositions have drawn investors looking for higher returns. Earlier this year, Chinese authorities attempted to crack down on this market and directed banks to bring securitised loans back on to their balance sheets by the end of 2011. However, that order was limited to existing products, most of which would have matured by the end of 2011 anyway, notes Chu.
In Fitch's estimation, informal securitisation continues unchecked - by its estimate, some 330 billion yuan of discounted bill purchases were camouflaged in this fashion during the third quarter of 2010. -PB News