In an article published in the Wall Street Journal about the Shadow banking in China, it describes
how Chinese banks managed to make loans off balance sheet, each time that regulators limited
several ways of shadow banking, banks worked out a way to get around the last one as well.
"The China Banking Regulatory Commission’s headaches started at the end of 2009, when it tried to rein in bank credit after a year of massive lending growth Beijing initiated to stimulate the economy in the face of the global financial crisis. While the headline figure for new lending in 2010 was lower than the 2009 figure, banks managed to keep total new credit ticking upward by using trust companies at the time minor players in China’s financial system , to move loans off-balance-sheet. But the loans only departed temporarily, with the banks promising to buy them back after a short period.
Soon after, the sale of wealth-management products at Chinese banks started to go mainstream. Wealth-management products are typically short-term funds that banks raise from clients to invest in assets — such as bonds, interbank loans, shares and index futures — that generate a higher return than the anemic deposit rates they are required to offer. While banks had been selling such products to wealthy customers for years, in 2011 the market started to rapidly expand, with banks aggressively marketing them and savers attracted by the promise of seemingly risk-free investments (after all, the banks were backing them).
The banks arranged for a trust company to package a loan for a corporate borrower, and the bank then used wealth-management funds to buy the loan.
In mid-2011, the CBRC intervened again, clamping down on the use of wealth-management-product funds to buy trust products backed by loans.
But soon the banks worked out a way to get around that as well.
Instead of buying the trust product directly from a trust company, the wealth-management product would buy the trust beneficiary rights — the right to the income stream from the trust product — from a third-party firm.
The business really took off in mid-2012, when the securities regulator vastly expanded the range of businesses that securities firms and fund-management companies could get involved with. Securities brokerages and fund companies readily stepped into the third-party role, positioned between the trust and the wealth-management product.
In March of this year, the banking regulator stepped in yet again.This time it put a cap on the amount of ‘non-standard credit assets’ – a catch-all to cover trust loans, trust beneficiary rights and hopefully anything else the banks could dream up – that could be repackaged as investments for customers.
Some banks have turned to private equity as a way to continue offering high returns on their wealth-management products without running afoul of limits on non-standard credit assets.
Still, some of the private-equity offerings look surprisingly like debt, with the companies the funds are nominally buying equity in promising to repurchase the equity at a pre-agreed upon point in the future—at a higher price—ensuring the investor a healthy return.
According to Simon Ho, a bank analyst at Citigroup in Hong Kong, the off-balance-sheet exposure of China’s major banks is equivalent to only 10% of their total assets. For smaller banks it’s as high as 30% or 40%, for some.
If those loans go sour it won't be a crippling crises for major banks".
how Chinese banks managed to make loans off balance sheet, each time that regulators limited
several ways of shadow banking, banks worked out a way to get around the last one as well.
"The China Banking Regulatory Commission’s headaches started at the end of 2009, when it tried to rein in bank credit after a year of massive lending growth Beijing initiated to stimulate the economy in the face of the global financial crisis. While the headline figure for new lending in 2010 was lower than the 2009 figure, banks managed to keep total new credit ticking upward by using trust companies at the time minor players in China’s financial system , to move loans off-balance-sheet. But the loans only departed temporarily, with the banks promising to buy them back after a short period.
Soon after, the sale of wealth-management products at Chinese banks started to go mainstream. Wealth-management products are typically short-term funds that banks raise from clients to invest in assets — such as bonds, interbank loans, shares and index futures — that generate a higher return than the anemic deposit rates they are required to offer. While banks had been selling such products to wealthy customers for years, in 2011 the market started to rapidly expand, with banks aggressively marketing them and savers attracted by the promise of seemingly risk-free investments (after all, the banks were backing them).
The banks arranged for a trust company to package a loan for a corporate borrower, and the bank then used wealth-management funds to buy the loan.
In mid-2011, the CBRC intervened again, clamping down on the use of wealth-management-product funds to buy trust products backed by loans.
But soon the banks worked out a way to get around that as well.
Instead of buying the trust product directly from a trust company, the wealth-management product would buy the trust beneficiary rights — the right to the income stream from the trust product — from a third-party firm.
The business really took off in mid-2012, when the securities regulator vastly expanded the range of businesses that securities firms and fund-management companies could get involved with. Securities brokerages and fund companies readily stepped into the third-party role, positioned between the trust and the wealth-management product.
In March of this year, the banking regulator stepped in yet again.This time it put a cap on the amount of ‘non-standard credit assets’ – a catch-all to cover trust loans, trust beneficiary rights and hopefully anything else the banks could dream up – that could be repackaged as investments for customers.
Some banks have turned to private equity as a way to continue offering high returns on their wealth-management products without running afoul of limits on non-standard credit assets.
Still, some of the private-equity offerings look surprisingly like debt, with the companies the funds are nominally buying equity in promising to repurchase the equity at a pre-agreed upon point in the future—at a higher price—ensuring the investor a healthy return.
According to Simon Ho, a bank analyst at Citigroup in Hong Kong, the off-balance-sheet exposure of China’s major banks is equivalent to only 10% of their total assets. For smaller banks it’s as high as 30% or 40%, for some.
If those loans go sour it won't be a crippling crises for major banks".
