BEIJING—China's banking regulator has quietly cracked down on banks selling their loans to trust companies, taking aim at a little-understood category of transactions that had fueled concerns about transparency in the banking system.
The transactions at issue had enabled banks to move loans off their balance sheets by temporarily selling them to Chinese trusts, lightly regulated companies that then repackaged the loans into financial instruments for clients. The banks promised to repurchase the loans any time between a few weeks and a few years later.
The China Banking Regulatory Commission issued a notice banning banks that sell loans to trusts from removing the loans from their balance sheets, said an executive in the risk management department of a Chinese bank who has seen the document. The notice was issue Dec. 24, but wasn't made public. Chinese newspapers have reported that it was sent to all Chinese banks. The CBRC didn't respond to faxed questions Monday.
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Banks have been unwilling to discuss the trust deals publicly, but analysts who had studied the transactions say the banks were using them to report lower loan totals at a time when China's government was indicating concern about credit expansion and pushing lenders to increase their capital ratios as a precaution against bad loans. Some analysts voiced concern that the deals, while involving a relatively small portion of China's total loans, presented problems for authorities in trying to track credit expansion, and raised questions about the true state of banks' financial positions.
While no official data on the loan-sale practice is publicly available, Shanghai Benefit Investment Consulting, a research company, estimates that 734 billion yuan ($107.53 billion) of bank loans were packaged into trust products in 2009. About 80% of that was issued in the second half of the year, as Beijing's concern about loan growth mounted. The volume of new bank loans more than doubled in 2009, as Chinese lenders-almost all of which are majority owned by the state—assisted government efforts to stimulate the economy.
Not all the loans sold to trusts fall into the category barred by the CBRC notice, but the order appears to have nearly halted such transactions. According to Shanghai Benefit, only seven new trust products backed by banks loans have gone on sale this month, compared with 465 for the whole of December.
"It's become a lot harder to get approval for new products," said Tang Liqiong, an analyst at Shanghai Benefit, adding the banks loaded most of their new issuance into the beginning of December as rumors circulated Beijing might rein in the practice.
The regulatory change could add to difficulties for some Chinese banks that were already facing constraints on their lending this year by the declines in their capital-to-loan ratios as a result of last year's credit explosion. Still, analysts say it's likely to be another banner year for bank lending in China, with many forecasting 2010's new loans will be between seven trillion and eight trillion yuan, down from around 9.5 trillion last year but far above the annual average for previous years.
