New reg­u­la­tions will de­mand greater dis­clo­sure about off-bal­ance sheet ac­tiv­i­ties

The Pak Banker - - FRONT PAGE -

China will rein in its shadow bank­ing sys­tem by re­quir­ing banks to pro­vide greater dis­clo­sure about their off-bal­ance sheet ac­tiv­i­ties, ac­cord­ing to peo­ple briefed on the new rules.

The Chi­nese shadow bank­ing sys­tem - credit flows be­yond tra­di­tional bank loans - has quadru­pled in size since 2008 to about CNY20 tril­lion ($3.2 tril­lion) or 40 per cent of eco­nomic out­put. Th­ese flows were cru­cial in re­viv­ing the coun­try's growth last year, but bank­ing an­a­lysts and rat­ing agen­cies have warned that they pose an in­creas­ing- ly se­ri­ous risk to Chi­nese eco­nomic sta­bil­ity. In ad­di­tion to the dis­clo­sures, there is also dis­cus­sion about whether to es­tab­lish a hard cap on the num­ber of off-bal­ance sheet in­vest­ment prod­ucts that banks can is­sue as a per­cent­age of their as­sets. Taken to­gether, the new reg­u­la­tions could lead to a slow­down in the ex­plo­sive growth of China's shadow bank­ing by mak­ing it tougher for banks to fun­nel de­posits into off-bal­ance sheet ve­hi­cles. But the moves would not spell the end of shadow bank­ing. In­stead, they re­flect a con­sen­sus among pol­i­cy­mak­ers that credit flows out­side the bank­ing sys­tem are a healthy devel­op­ment for China, so long as they are mon­i­tored and kept in check. The dis­clo­sure re­quire­ments will be­gin as a trial in Shang­hai in late March or early April, ac­cord­ing to a per­son who has seen the draft rules. Banks will be asked to reg­is­ter their wealth man­age­ment prod­ucts or WMPs - de­posit-like in­stru­ments that of­fer higher yields and are mostly held off­bal­ance sheet - with the lo­cal reg­u­la­tor.

"The main thing is mon­i­tor­ing the risks of the WMPs," the per­son said. "The dis­clo­sures will fully cover the size, the va­ri­ety, the ma­tu­rity and the in­ter­est pay­ment in­for­ma­tion for the prod­ucts." So long as banks pay back the prin­ci­pal and in­ter­est at ma­tu­rity, which is typ­i­cally one year or less, it will be easy for them to con­tinue sell­ing new in­vest­ment prod­ucts, he said.

More rad­i­cal yet is the de­bate over es­tab­lish­ing a hard ceil­ing on the is­suance of the WMPs. Two bankers said they had been in­formed that the reg­u­la­tor was con­sid­er­ing lim­it­ing such as­sets to 20 per cent of their de­posit base.

Cur­rently, WMPs amount to 10 per cent of to­tal de­posits in the Chi­nese bank­ing sys­tem. But that is up from vir­tu­ally noth­ing three years ago. Smaller banks have been par­tic­u­larly ag­gres­sive in their is­suance of WMPs as a way of at­tract­ing new cus­tomers and sev­eral are al­ready near the 20 per cent mark.

It is not clear whether the cap would be en­forced as a rule or sim­ply given to banks as a guide­line. Un­til re­cently reg­u­la­tors had taken a per­mis­sive stance to­wards shadow fi­nanc­ing, ar­gu­ing that was an im­por­tant part of chan­nelling money flows away from banks, which have his­tor­i­cally pro­vided about 90 per cent of credit in China through or­di­nary loans.

Zhou Xiaochuan, the cen­tral bank gov­er­nor, said late last year that shadow bank­ing in China was much smaller in scale and bet­ter con­trolled than its coun­ter­part in devel­oped economies, where lend­ing by hedge funds and in­vest­ment banks mag­ni­fied the global fi­nan­cial cri­sis.

How­ever, prob­lems with three sep­a­rate bank-is­sued in­vest­ment prod­ucts in De­cem­ber raised the spec­tre of de­faults and ap­pear to have contributed to the change in at­ti­tude.

In a speech four weeks ago Yan Qing­min, as­sis­tant chair­man of the China Bank­ing Reg­u­la­tory Com­mis­sion, said that some banks were im­prop­erly cre­at­ing as­set pools with their WMPs - a prac­tice whereby in­flows from new in­vestors can be used to re­pay old in­vestors and thereby cover up failed in­vest­ments.

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