Mainland banks face mounting loan dangers

Regulator orders tighter control of wealth management products and seeks to stop contagion from underground financing

PUBLISHED : Wednesday, 16 January, 2013, 12:00am
UPDATED : Wednesday, 16 January, 2013, 3:41am

The mainland banking sector is said to be facing increasing risks from problematic loans and off-balance-sheet businesses, leaving regulators a daunting task in the future.

The top priority of the China Banking Regulatory Commission (CBRC) this year is to prevent "systematic risk" and "regional risk", the regulator said at its annual work meeting on Monday.

The CBRC will "strictly control" risks related to off-balance-sheet businesses, including wealth management products sold by banks, and prevent risk spreading from the underground financing market to the banking system, the regulator said on its website yesterday.

Banks should also improve the management of default risks in loans to local government financing vehicles, property developers and industries with overcapacity problems, a legacy of the lending spree in 2009 that helped fund the nation's 4-trillion-yuan (HK$4.94 trillion) stimulus package.

The call for better management comes as the "external impact" from shadow banking and "internal pressure" to raise competitiveness force lenders to take risks, according to the regulator.

Zhang Zhiwei, chief China economist at Nomura Securities, said the CBRC's top policy objective of "controlling risks" suggested credit growth, as measured by total social financing, likely peaked in the second half of 2012 and would decline this year. There are fears that shadow banking credit could implode and affect the traditional banking system.

Last month, the failure of a wealth management product (WMP) distributed by Huaxia Bank, which led to depositors losing several hundred million yuan, set off alarm bells about the country's shadow banking system. The WMP was sold as a trust loan, with an expected annual return of 11 per cent, but the money actually went to a private equity fund, according to media reports.

The CBRC ordered lenders at the meeting to tighten their grip on WMPs. It banned banks from selling private-equity fund products, and asked them to manage WMPs with fixed incomes and those providing floating incomes under separate accounts.

The total size of bank-distributed WMPs, excluding mutual funds and insurance, was estimated at 10 trillion yuan at the end of last year, according to a Bank of America Merrill Lynch report last week.

Among them, nearly 40 per cent were invested in liquid assets with relatively low risks, 35 to 40 per cent were bank loans sold off balance sheet and 5 to 10 per cent were equity investments. The category with the highest risk and return is collective trusts, originated by trust companies, which accounted for less than 20 per cent of the market, according to the report.

"The WMP product defaults are inevitable, given the rapid growth and moral hazard in certain products," analysts Winnie Wu and Michael Li said in the report. "[But], the risk of a systematic liquidity crunch seems very low for now, due to the relatively small size of the risky WMPs and the banking system supported by high household savings."