Risks flagged as Chi­nese banks dodge loan quo­tas

The Pak Banker - - Company& -

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

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