Saturday, May 10, 2014

The Coming China Crash

Smaller China banks step up shadow lending activity -

The 2013 results of unlisted banks, published over the past week, reveal that city-based lenders have been among the most aggressive in China in using complex credit structures to evade regulatory controls and issue higher-yielding loans.

For the 10 banks, which operate in large cities from Shijiazhuang in the north to Fuzhou in the south, investments in trust plans and holdings of other non-standard credit products climbed to 23.3 per cent of their total assets last year, up from 14.3 per cent in 2012.

May Yan, China banking analyst with Barclays, said: "These [non-standard credit products] are often high yielding but have poor liquidity. In good economic times, if the asset quality is still OK, banks can earn a good margin. The risk is that if there is a lot of these, in a down-cycle they can add considerable asset pressure."

The mixture of shadow financing assets held by the unlisted banks varies greatly. The Bank of Tianjin has 34 per cent of its assets in non-standard credit instruments, with one-quarter in the form of rights to income streams from trust products held via repurchase agreements.

The government last year drafted rules that would make it more difficult for banks to funnel credit into shadow channels. But people familiar with city commercial banks say those rules have still not been implemented and first-quarter data published this week by listed banks confirmed that shadow lending activity had continued to increase.

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