Non-bank credit fi­nanc­ing risks re­main man­age­able

The Pak Banker - - Front Page - Jian Chang

THE rapid ex­pan­sion of non-bank credit fi­nanc­ing in China has rekin­dled con­cerns about ris­ing fi­nan­cial and fis­cal risks. How­ever, we be­lieve th­ese risks re­main man­age­able for now.

In­creased cor­po­rate bond is­suance and a re­vival of "shadow bank­ing" ac­tiv­i­ties have be­come im­por­tant sources of fi­nanc­ing, sup­port­ing the sta­bi­liza­tion of eco­nomic growth in the coun­try, de­spite lower-than-ex­pected new bank loans in re­cent months.

The boom­ing bond mar­ket re­flects the government's pro­mo­tion of di­rect fi­nanc­ing, which should re­duce the re­liance on the bank­ing sys­tem, di­ver­sify risks, and im­prove the ef­fi­ciency of re­source al­lo­ca­tion.

To­tal so­cial fi­nanc­ing has risen to 13 tril­lion year-to-Oc­to­ber, and could reach around 15 tril­lion (rep­re­sent­ing 26 per­cent of GDP) in 2012.

The share of bank credit in to­tal so­cial fi­nanc­ing is now 55 per­cent, down from the 58 per­cent in 2011 and 70 per­cent in 2008, while that of debt fi­nanc­ing has jumped to 14.3 per­cent from 9.5 per­cent and 8 per­cent re­spec­tively. Off-bal­ance sheet lend­ing has stayed at around 20 per­cent.

On the other hand, there are re­newed con­cerns about the fi­nan­cial and fis­cal risks as­so­ci­ated with the rapid ex­pan­sion of non-bank credit fi­nanc­ing.

Two types of risk are fre­quently men­tioned. First, risks from the siz­able trust and en­trusted loans; Sec­ond, risks from a re­bound in lo­cal government in­vest­ment ve­hi­cles' (LGIVs) bor­row­ing, this time from the bond mar­ket and trusts rather than from banks as in 2009 and 2010.

2012 has seen a re­vival of trust fi­nanc­ing af­ter reg­u­la­tory curbs in­tro­duced since mid-2010 muted ac­tiv­ity.

Trust sec­tor as­sets un­der man­age­ment have risen from 4.8 tril­lion in 2011 to 6.3 tril­lion by the third quar­ter, with a sig­nif­i­cant amount of lend­ing to de­vel­op­ers or LGIVs that can't ac­cess bank credit.

More than 35 per­cent of trust as­sets rep­re­sent fund­ing for in­fra­struc­ture and real es­tate con­struc­tion. Prop­erty-linked trusts ac­count for 677 bil­lion, or 11 per­cent of the to­tal.

On the back of ef­forts by lo­cal gov­ern­ments to sta­bi­lize growth amid fall­ing fis­cal rev­enue growth, 2012 also saw a surge in LGIV bond is­suance, to­tal­ing 927 bil­lion by Oc­to­ber. More than half of the funds raised were used for cap­i­tal goods in­vest­ment (ie, build­ing and con­struc­tion projects), fol­lowed by trans­porta­tion (ie, high­ways, air­ports, 19 per­cent). This is in ad­di­tion to the 10.7 tril­lion yuan (27 per­cent of GDP) to­tal lo­cal government debt by end-2010.

While some iso­lated (de facto) de­faults are likely and prob­a­bly should be wel­comed, over­all, the sys­temic fi­nan­cial or fis­cal risks from el­e­vated trust and en­trusted loan lev­els and the ris­ing LGIV bor­row­ings are man­age­able for now. This is be­cause of strict reg­u­la­tory, the struc­ture of the loans, and the still solid cen­tral government fis­cal po­si­tions.

Both trust and en­trusted loans have lim­ited di­rect-risk ex­po­sure to the banks. Banks' di­rect involvement in trust lend­ing is low, ex­cept for the devel­op­ment of "Bank-trust co­op­er­a­tion prod­ucts" which are strictly reg­u­lated.

Such prod­ucts now ac­count for 20 per­cent of banks' to­tal wealth man­age­ment prod­ucts (WMPs), ac­cord­ing to the 2012 KPMG sur- vey. In other cases, banks act mostly as dis­trib­u­tors of WMPs. In a typ­i­cal de­vel­oper trust, a trust com­pany pro­vides funds to a project com­pany by sell­ing WMPs to high net-worth clients. Banks act purely as in­ter­me­di­aries for en­trusted loans, and hence are not sub­ject to credit risks.

How­ever, a source of con­cern is that risks may be ar­ti­fi­cially sup­pressed by some form of debt re­struc­tur­ing: rolling over debt via the is­suance of new prod­ucts or buy­outs by as­set man­age­ment com­pa­nies.

A de facto de­fault of a prop­erty trust is­sued by Jilin Province Trust hap­pened in May when it de­layed pay­ments by eight days (sub­se­quently it was bought by a State- owned as­set man­age­ment com­pany). Shan­dong Helon, a tex­tile com­pany on the verge of de­fault­ing on 400 mil­lion yuan of com­mer­cial pa­per in April, was rescued by banks af­ter lo­cal government in­ter­ven­tion.

Such buy­outs/bailouts may cre­ate a false sense of se­cu­rity, re­in­forc­ing the be­lief of an "im­plicit government guar­an­tee". The un­der­es­ti­ma­tion of the credit risks in both the trust loans and bond mar­kets could in­duce ex­ces­sive risk­tak­ing.

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