China frets over shadow bank­ing sys­tem


In March 2013, re­tired chem­i­cal com­pany em­ployee Anne Xing, her older sis­ter and their hus­bands vis­ited a China Ever­bright Bank branch on the out­skirts of Shang­hai. A pri­vate wealth man­ager at the bank had a spe­cial deal to of­fer them.

"He said there is a high-qual­ity prod­uct," Xing re­calls. "Only elite cus­tomers can buy it. We asked him if there was any risk. He said there was no risk."

The two cou­ples sank about 5 mil­lion yuan (about $762,000) into the in­vest­ment prod­uct, which of­fered 9.5 per cent an­nual in­ter­est over two years - sub­stan­tially higher than the 3.75pc they could earn on a fixed, two-year de­posit at the same bank. Xing's sis­ter said she sold a prop­erty for 3 mil­lion yuan to fund her in­vest­ment. The two fam­i­lies say they didn't know ex­actly where the money was go­ing at the time. When the con­tracts ar­rived weeks later, it turned out they had en­tered China's $9.8 tril­lion shadow bank­ing in­dus­try.

By De­cem­ber 2015, the in­ter­est pay­ment for the sec­ond year was al­ready well over­due and the cou­ples were wor­ried. "Then the sky came crash­ing down," Xing said. "The money was gone, a cou­ple of mil­lion."

Ever­bright had ac­tu­ally sold the two cou­ples a stake in Chang'an Trust Coal In­dus­try Re­source In­vest­ment Fund Three A Col­lec­tive In­vest­ment Fund Plan. Their money had been lent to a coal miner that soon went bust. The Chang'an Trust prod­uct was one of count­less so­called wealth man­age­ment prod­ucts sold to in­vestors to help raise money for a mas­sive wave of lend­ing in China that be­gan in the af­ter­math of the 2008 global fi­nan­cial cri­sis.

The widely pub­li­cised de­fault burned Anne Xing and other in­vestors who now are su­ing Chang'an. "I've be­come like the men­tally ill, re­ally," says Xing. Amid the ac­ri­mony over the loss, Xing says, her sis­ter di­vorced her hus­band.

Ever­bright did not re­spond to sev­eral re­quests from Reuters for com­ment. In a writ­ten re­sponse, Chang'an said: "This case is cur­rently be­ing pro­cessed by the courts. Please wait for the judg­ment."

Con­ducted out­side the nor­mal bank­ing sys­tem, lend­ing like this is at the heart of China's mas­sive shadow bank­ing in­dus­try. For China's rulers, the fear is that there may be more bad loans in the shad­ows of the fi­nan­cial sys­tem. The dan­ger is that a big de­fault or se­ries of loan losses could cas­cade through the world's sec­ond-big­gest econ­omy, lead­ing to a sud­den halt in bank lend­ing.

Top lead­ers in Bei­jing have ac­knowl­edged that the colos­sal vol­ume of com­plex and po­ten­tially risky lend­ing ob­scured in shadow bank­ing com­pounds the threat posed by the econ­omy's tremen­dous accumulation of debt since the global fi­nan­cial cri­sis.

In­side and out­side China, alarms are now sound­ing about mount­ing debt. Zhou Xiaochuan, the head of China's cen­tral bank, the Peo­ple's Bank of China, has openly warned that au­thor­i­ties need to curb fi­nan­cial risks that might lead to a "Min­sky Mo­ment" - a sud­den col­lapse of as­set prices, sparked by debt or cur­rency pres­sures, af­ter a long pe­riod of growth. Zhou said cor­po­rate debt lev­els were rel­a­tively high and house­hold debt was ris­ing fast, in re­marks in Oc­to­ber on the side­lines of the Com­mu­nist Party's 19th congress in Bei­jing.

"We should fo­cus on pre­vent­ing a dra­matic ad­just­ment," he said. A bliz­zard of reg­u­la­tions, high-pro­file ar­rests and of­fi­cial warn­ings over the last 18 months have sent a clear sig­nal that au­thor­i­ties are at­tempt­ing to reign in ex­cesses. A vet­eran of the coun­try's fi­nan­cial re­forms, Guo Shuqing, was ap­pointed in Fe­bru­ary to head the China Bank­ing Reg­u­la­tory Com­mis­sion. Guo al­most im­me­di­ately is­sued a flurry of di­rec­tives aimed at forc­ing banks to im­prove risk man­age­ment and curb the sale of com­plex, high-yield­ing wealth man­age­ment prod­ucts to in­vestors.

In Novem­ber, Bei­jing set up the Fi­nan­cial Sta­bil­ity and De­vel­op­ment Com­mit­tee, a top-level panel of reg­u­la­tors tasked with polic­ing tougher rules and clos­ing loop­holes that al­low risky lend­ing. Days later, the Peo­ple's Bank of China and fi­nan­cial reg­u­la­tors jointly is­sued new draft rules to gov­ern the wealth man­age- ment in­dus­try.

China's bank­ing reg­u­la­tor and the cen­tral bank did not re­spond to ques­tions from Reuters about the risks of shadow bank­ing.

Be­fore the 2008 fi­nan­cial cri­sis, there was very lit­tle shadow bank­ing in China. In the af­ter­math of that shock, Chi­nese au­thor­i­ties launched a mas­sive ef­fort to stim­u­late the econ­omy, mostly through a huge in­crease in lend­ing. This led to a boom in prop­erty and in­fra­struc­ture spend­ing that con­tin­ues to­day. De­mand for credit in­creased sharply, es­pe­cially from lo­cal and mu­nic­i­pal gov­ern­ment-owned com­pa­nies.

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