Fitch Ratings warned yesterday that rising off-balance-sheet exposures have provided mainland banks with a means to tweak financial statements, increasing the risks to China's banking system.
Charlene Chu, senior director of financial institutions with Fitch Ratings, said this increasing exposure 'provides banks with a channel to massage financials'.
The Fitch sovereign team recently downgraded the growth outlook for China to the mid-eight percentile range, but did not move on to the banks.
'We expect the China sovereign [Beijing] to step in and support the banks, and therefore it becomes a sovereign-worthiness issue rather than a credit-worthiness issue. But beyond that, we are pretty concerned about a pretty big issue with bad debt over the next few years,' Chu said.
The banks' off-balance-sheet activities include disclosed items such as acceptances, letters of credit, guarantees, commitments, entrusted loans and assets under custody. The undisclosed ones include assets and liabilities related to informal securitisation and wealth management activity.
Chu said the disclosed off-balance-sheet items amounted to about one-fourth of total bank assets, or US$3.5 trillion to US$4 trillion.
Growth of the disclosed items had been particularly fast at smaller banks. They predominantly carry acceptances, which are effectively bank-backed, short-term, non-interest-bearing notes and qualify as money market instruments. Larger banks have more exposure to credit commitments and guarantees.