In China, off-balance-sheet lending risks lurk in the shadows

Mon Apr 8, 2013 3:33am EDT
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By Gabriel Wildau and Shengnan Zhang

SHANGHAI (Reuters) - China's banks are feeding unwanted assets into the country's "shadow banking system" on an unprecedented scale, reinforcing suspicions that bank balance sheets reflect only a fraction of the actual credit risk lurking in the financial system.

Banks' latest earnings reports only added to concerns. Despite the slowest economic growth in 13 years in 2012, the banking system's official non-performing loan (NPL) ratio actually declined, renewing a debate about how reliable those figures are.

But the key question is no longer how much risk banks are carrying. Rather, it's how many risky loans have been shifted to the lightly regulated shadow banking institutions - mainly trust companies, brokerages and insurance companies.

The risk to the overall financial system is not clear, because of insufficient data about the quality of credit in the shadow banking sector.

Trust companies and brokerages probably aren't buying many bad loans directly, analysts and industry executives say, but they have become a vital source of credit, allowing banks to arrange off-balance-sheet refinancing for maturing loans that risky borrowers cannot repay from their internal cash flow.

Without these institutions, the amount of NPLs might have been much higher, though no one is quite sure how high.

Trust assets increased 55 percent in 2012 to 7.5 trillion yuan ($1.21 trillion), according to the China Trustee Association, while funds entrusted to brokerages by banks soared more than fivefold to 1.61 trillion yuan.

"There is absolutely an impact on NPL figures from the ability to offload stuff through these channels," said Charlene Chu, China banks analyst for Fitch Ratings.   Continued...

People walk along a busy street at Pudong financial district in Shanghai, March 27, 2013. REUTERS/Carlos Barria