Banking tricks blunt China's drive to increase lending

Thu Nov 27, 2014 4:30am EST
 
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By Engen Tham

SHANGHAI (Reuters) - China hopes that last week's interest rate cut will increase lending into the economy to shore up flagging growth, but measuring any rise will be impeded by a number of tricks the country's bankers use to manipulate the figures.

Chinese banks, which are heavily controlled by the government, are often instructed to match their lending practice to further official policy, and when the People's Bank of China cut rates for the first time in two years on Friday, it made clear that helping smaller firms gain access to credit was among its goals.

Outstanding yuan loan growth slipped to its slowest in almost nine years in October, and the PBOC's efforts might well succeed in raising the headline figures, but bankers say it is commonplace to game the statistics to hit targets.

One trick is to extend a loan but then ask the borrower to use a portion of the fund to purchase wealth-management products sold by the bank, helping to hit both loan goals and sales targets.

Another technique is to require a portion of the money lent - anywhere between 30 and 40 percent, according to bankers - returned as deposits, so it can earn interest on the whole loan, while effectively retaining part of it.

"It's just internally generated business through a dummy counterpart," said Jimmy Leung, banking and capital markets leader and partner at PwC China.

The banking regulator has said these practices are illegal but say only "some commercial banks" engage in them. Bankers say manipulation is still rampant.

"It's very common," said a banker at a major state-owned bank who declined to be identified.   Continued...

 
A sign for pedestrians is seen in front of the headquarters of the People's Bank of China, China's central bank, in central Beijing November 24, 2014. 
REUTERS/Kim Kyung-Hoon