Fitch sees growing risk on mainland

PUBLISHED : Thursday, 23 June, 2011, 12:00am
UPDATED : Thursday, 23 June, 2011, 12:00am


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.

Chu said undisclosed items, however, had been extremely difficult to track, due to poor disclosure.

Informal securitisation and wealth management activities had continued to grow. But issuance of new, explicitly credit-related products had declined after a crackdown by the China Banking Regulatory Commission last year, she said.

Fitch estimated that the nominal amount of credit-backed wealth management products sold by banks reached about 2.5 trillion yuan (HK$3 trillion) in the first quarter.

Wealth management activity carried unique liquidity and credit risks, Chu said. The risk had not disappeared but had merely been transferred to investors.

As for loan exposure to local government financial vehicles, Chu said local government and property exposure was larger than sectoral breakdowns suggested.

Data on local government exposure differs widely depending on the source or how it is defined. The regulatory commission suggests that the exposure could total 9 trillion yuan, while the People's Bank of China has said the exposure would not exceed 14 trillion yuan.

The central bank's total is higher because its interpretation is broader, and includes other loans extended to local governments and the Ministry of Railways.