Thus far, mostof the concerns about shadow banking in China have centred on trusts. Byoffering returns as high as 10%, they raise money from businesses andindividuals frustrated by the low cap the government imposes for interest rateson bank deposits. The interest they charge to borrowers, naturally, is evenhigher. They lend to firms that are unable to borrow from banks, often becausethey are in frothy industries, such as property or steel, where regulators seesigns of overinvestment and so have instructed banks to curb lending. Overtwo-fifths of Yangzijiang’s loans go to property developers in smaller Chinesecities; land makes up nearly two-thirds of its collateral.
China’s economyis slowing. It has grown by 7.6% for the past two years, the slowest rate since1990. Several trust products have defaulted, although investors in most of themhave got their money back one way or another. Over $400 billion-worth of trustproducts are due to mature this year—and borrowers will want to roll over manyof those loans. Many observers worry that investors will lose faith in trusts,prompting a run, which may, in turn, blight certain industries and other partsof the financial system. No country, pessimists point out, has seen credit inall its forms grow as quickly as China has of late without suffering afinancial crisis.
One reason foroptimism is that trusts are regulated by the same agency that supervises banks,the China Banking Regulatory Commission (CBRC). This, argues Jason Bedford, anindependent expert who used to audit trust companies, means the CBRC can tellnot only whether the trusts themselves are wobbly, but also how any wobbleswould affect banks. As our special report this week explains, it and otherregulators have recently strengthened oversight of trusts, requiring cleareraccounting and limiting dealings with banks.
Now thatregulators are tightening the screws on trusts, money is flowing to other, lessclosely watched intermediaries. “Shadow banking in China looks like acat-and-mouse game,” declares Liu Yuhui, chief economist of GF Securities, abrokerage house.
For instance,the CBRC’s limits on the ways that banks and trusts could co-operate do notapply to securities houses. That has fuelled a boom in the assets these firmsmanage: they rose to 5.2 trillion yuan by the end of last year, up from 1.9trillion yuan a year earlier. In some instances, the brokers are using loansoriginated by banks to back “wealth-management products” they sell to investorsthemselves; in others, they are acting as intermediaries to allow trusts to dothe same, in spite of the new rules. These manoeuvres, in effect, allow banksto sidestep various restrictions on their lending.
Trustbeneficiary rights products (TBRs) are another way around the restrictions ondealings between banks and trusts. A bank sets up a firm to buy loans from atrust; it then sells the rights to the income from those loans to the bank—aTBR is born. The bank can then sell the TBR to another bank. The intention, MrBedford says, is often to make risky corporate loans look like safer lendingbetween banks, thereby evading capital requirements and minimum loan-to-depositratios, among other rules.
Entrusted loansare yet another fast-growing form of shadow banking. These involve cash-richcompanies, often well-connected state-owned enterprises (SOEs), lending to lesswell-connected firms. There are so many SOEs now competing with Yangzijiang tooffer loans, reports Liu Hua, the shipbuilder’s chief financial officer, thather firm has been forced to reduce the interest rates it charges from around15% a year to closer to 10% a year.
Such loans,often made using banks as intermediaries to get around regulations forbiddingsuch lending, expose the financial sector to yet more risk. The value of newentrusted loans in March was 239 billion yuan, up 64 billion from a yearearlier. Companies borrowed 716 billion yuan via entrusted loans in the firstthree months of the year; corporate bond issuance over the same period amountedto only 385 billion yuan.
Entrusted loansare not the only way companies are lending to one another. Hangzhou, home toAlibaba and many other entrepreneurial outfits, is one of China’s richestcities, but it is now undergoing a quiet financial crisis. Its many small steeland textile entrepreneurs found it hard to get loans from official banks, so theybanded together. Reports suggest that firms guaranteed one another’s debts,forming a web of entanglements that helped everyone get credit during goodtimes. But now, with the economy slowing, the weaker firms are beginning todefault, dragging healthy ones down too.
Steel traders inGuangdong, chemicals firms in Zhejiang and coal miners and energy firms inShanxi appear to have developed similar networks. Xinhua, China’s official newsagency, has reported that in some of these industries the guarantees invokedhave spread from the “first circle” of firms vouching for the originaldefaulters to the “second” and “third” circles, meaning guarantors of theguarantors.
Just as a crisisin shadow banking could spread to the real economy, a sharp downturn in somesectors could cause trouble for shadow banks, leading to a broader financialmess. Many trust loans are secured with property, and many developers arereliant on shadow finance, but China’s raging property market is showing signsof cooling, especially in smaller cities. The fear is of a downward spiral inwhich the pricking of the property bubble leads to a panic in shadow finance,which reduces access to credit, pushing property prices and economic growthdown further.
How bad couldthings get? IHS, a consultancy, recently predicted that such a property crashcould reduce China’s GDP from a forecast 7.5% this year to 6.6%, and to 4.8%next year. That may not sound like the end of the world, but by China’sstandards, it would be an alarming slowdown.
All this poses agenuine dilemma for China’s regulators. They have long desired to develop deepand versatile capital markets, and shadow banking is a natural part of that.Indeed, there is an argument that China would benefit from the expansion ofcertain forms of shadow banking, such as the securitisation of loans.
Although somekinds of lending are clearly getting out of hand, the losses should bemanageable. For all the subterfuge Chinese shadow banks indulge in, their loansusually come with decent collateral. The biggest threat to the system is thatby moving too forcefully to rein in shadow lending, regulators accidentallyprecipitate a run on shadow banks. Instead, they are moving warily, slowlyratcheting up regulation and allowing the occasional minor default.
Calibrating thiscurtailment, however, will be tricky. Standard & Poor’s, a ratings agency,argues that reforms could lead to “a turbulent period in which funding coulddry up as the domestic market struggles to re-price risk”. That is a polite wayof saying that there is no easy way out of China’s shadow-banking mess.
From the printedition: Finance and economics
收集：彭建
后期：谢天扬
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