China's banking watchdog has warned trust companies to stop selling investments backed by banks' so-called discounted bills.
It is one of the latest moves aimed at monitoring lenders' off-balance-sheet risks, according to people familiar with the matter.
Banks have been working with trust firms to sell investments that have discounted bills as underlying assets, as a means to free up banks' loan books. The problem, analysts say, is that the practice circumvents Beijing's efforts to monitor and control growth of credit and essentially disguises risks banks are taking.
For the past few years, companies that have experienced challenges in obtaining bank loans have often used 'discounted bills' and 'acceptances' to obtain money from banks.
The financial instruments occupy an arcane corner of the financial world. When two companies enter a trade, the seller usually will require the buyer to obtain an acceptance from its bank. The acceptance is essentially a guarantee for future payment backed by the bank. Once the selling party receives the acceptance, it has the option to cash it at any bank at a discount to face value.
For example, if the acceptance is 100 yuan, the company may turn it in and receive 95 yuan from a bank. When this happens, the bank discounting the acceptance records the transaction in its loan portfolio as a 'discounted-bill claim' on the bank issuing the acceptance, which is an off-balance-sheet item.