China shadow bank clampdown eyes $2tn of entrusted loans
Beijing seeks to shut down a giant market of unregulated lending
China’s banking regulator has put new curbs on the country’s Rmb13.8tn ($2.13tn) entrusted lending business, a sign that the crackdown on shadow banking launched by Beijing in 2017 will extend into the new year.
Rules issued at the weekend by the China Banking Regulatory Commission bar banks from arranging entrusted loans or providing guarantees on them. They also stop the loans from being used to buy equities, bonds or derivatives by the company borrowing.
Entrusted loans are loans made from one company to another in what has come to resemble banking activity but without the same level of risk controls that licensed lenders exercise when making credit decisions.
The rules, which reduce banks to intermediaries in the entrusted lending business, are part of an effort from China’s regulators to stem risk in the country’s financial sector, much of which was leveraged off banks’ balance sheets, and out of clear view.
“In many areas of shadow banking, I think this kind of regulation will become tighter and tighter,” said Xia Le, chief economist for Asia at BBVA. “This is going to put pressure on banks because shadow banking has already become an important source of income for them” as they earn fees guaranteeing and arranging the transactions.
Banks that guarantee such loans do not disclose that liability on their balance sheet, and it is not constrained by loan-to-deposit rules or capital adequacy measures. The upshot is that this vast volume of loans is unregulated.
Shadow banking continued to grow in the first half of 2017. Shadow banking assets hit Rmb64.7tn at the end of June, about 27 per cent of total banking assets but just a 0.5 per cent increase from the end of 2016, according to data from Moody’s.
Entrusted loans rose faster during that period, at about 4.5 per cent, to Rmb13.8tn. However, growth in that business, considered a core element of shadow banking, has slowed over the past few years. During 2016, entrusted loans rose 21 per cent from the year before.
Companies engaged in entrusted lending often lend out excess cash but many also borrow from banks and then re-lend at much higher rates to other companies, often to ones that could not get approval for bank loans in the first place.
Banks have grabbed part of the business by acting as arrangers for the loans, said Mr Xia, but many do not play a role in monitoring the activity. “They get the fees but don’t do much else,” he said.
Several large state-owned steel and coal companies, such as Baosteel and coal miner China Shenhua, have in the past pushed into the entrusted lending business.
Starting in early 2017, the CBRC and China’s central bank launched a series of measures that have taken aim at various channels used to structure off-balance-sheet lending.
In November, the People’s Bank of China published rules aimed at the country’s $15tn asset management market that prohibited asset managers from promising investors a guaranteed rate of return, while also requiring them to set aside 10 per cent of the management fees they collect for provisioning purposes. In September, money market funds came under regulatory attack.