Text messages in China start cycle that sees funds enter shadow banking

Even the biggest banks are hawking financial products as they enter world of shadow banking

PUBLISHED : Wednesday, 03 July, 2013, 12:00am
UPDATED : Wednesday, 03 July, 2013, 4:48am


Text message solicitations began arriving on the mobile phones of many wealthy mainlanders last month, promising access to lucrative wealth-management products with yields far above the central government's benchmark savings rate.

One message read: "China Merchants Bank will issue a high interest financing product starting from June 28 to 30. The product will be 90 days with a 5.5 per cent interest rate. Please call us now."

A day later, another message said the interest rate had been raised to 6 per cent and it was a case of "first come first served".

The offers are not coming from fly-by-night operators but some of China's biggest banks. They are raising huge pools of cash to finance a relatively new and highly profitable sideline business: lending outside the scrutiny of bank regulators.

The complex way they go about making off-the-balance-sheet loans is at the heart of the mainland's US$6 trillion shadow banking industry, which the government is now trying to tame. Efforts to rein in the dodgy lending practices put stock markets around the world in a spin late last month.

Regulators, economists and investors worry that legitimate banks are using lightly regulated wealth-management products to repackage old loans and prop up risky companies and projects that might not otherwise be able to borrow money.

Analysts warn that shadow banking is helping fuel the rapid growth of credit in a weakening economy, which could lead to bank failures.

"This is the biggest uncertainty I've seen in my 18 years following the China market," Dong Tao, an economist at Credit Suisse, said of shadow banking. "You don't know how banks are deploying capital."

What banks are doing, analysts say, is pressing customers to shift money from the old, regulated part of their operations - savings deposits - into the new, less regulated part consisting of high-yielding wealth-management products that can circumvent government interest rate controls and be used to finance high-interest loans to desperate customers.

Much of the money, they say, is lent to property developers and local government financing vehicles, areas that have government officials worried because of an explosion in property development and soaring housing prices. Regulated banks see the borrowers as too risky, so the loans are often made off the balance sheet, and therefore outside the purview of bank regulators.

"The banks now have these dark pools of money," said Joe Zhang, a former investment banker and the author of Inside China's Shadow Banking: The Next Subprime Crisis? He added, "To finance deals they usually have a trust company stand in the middle and simply put their stamp on it. The trust companies get a fee for that but often they do next to nothing. The bank does all the work."