Chinese banks have been ordered to account for around Rmb2,300bn ($340bn) in off-balance sheet loans in a move that could put some lenders under serious stress and require another large round of capital-raising.
The China Banking Regulatory Commission, China’s banking regulator, has told lenders they must put all loans sold or transferred to lightly regulated Chinese trust companies back on their books and stop using “informal securitisation” to evade regulatory requirements.
“We’ve learnt the lesson of the financial crisis and we realise we need to strengthen oversight over this phenomenon,” a senior regulator told the Financial Times.
The repackaging of loans into securitised products has been blamed for exacerbating the global financial crisis in the west but such complex instruments had been littled used in China.
Yet in the last year, and especially in the last six months, a largely unregulated market in securitised loans has proliferated as banks have strained to get around the government’s attempts to rein in rampant lending growth.
Fitch Ratings estimates that in the first half of the year alone banks extended around Rmb1,300bn in loans. Trust companies repackaged these loans and sold them to companies or handed them back to banks for sale to customers.
Thanks to government tightening measures, China’s banking sector had appeared to be returning to a more sustainable level of loan growth this year following last year’s unprecedented expansion in credit.
But if off-balance sheet securitised loans are counted, total new lending in China in the first half of the year reached around Rmb5,900bn, or nearly 30 per cent more than the official figure of Rmb4,600bn.
That higher figure makes it unlikely the government will be meet this year’s target of around Rmb7,500bn in total new lending.
The total outstanding credit sitting off banks’ balance sheets in trust company products is around Rmb2,300bn, up nearly 10-fold from the end of 2007, according to government and independent estimates.
Putting this back onto the banks’ books will strain capitalisation and loan to deposit ratios and could force some banks to turn to the capital markets even before an ongoing massive round of fund-raising has been completed.
“The transfer of a growing amount of credit off banks’ balance sheets and out of the purview of market participants is the most disconcerting trend Fitch has observed in China’s banking sector in recent years,” according to Charlene Chu, a senior analyst at Fitch Ratings.
China’s banking regulator was so concerned about the rapid growth in informal securitisation that it issued a temporary ban on all such transactions between banks and trust companies last month.
But some banks have continued to offer these products, popular because they offer an attractive return in an environment with pitifully low savings rates and languishing equity and property markets.
Three major banks all said on Tuesday they had suspended sales of trust company products but one, China Merchants Bank, was still offering a product based on the securitized loan of a Chinese coal miner that promised a minimum annual return of 8 per cent.
According to the bank salesman: “There’s hardly any risk to this investment because the company’s assets are a lot bigger than the Rmb800m it’s borrowing; it’s quite safe I assure you.”
