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Jangled nerves at smaller lenders as China’s central bank mulls next move on wealth management sector

PBOC’s latest statement gives little away on timing – but China’s mid-tier banks are still caught in the shadows, awaiting its next move

PUBLISHED : Thursday, 03 November, 2016, 4:13pm
UPDATED : Thursday, 03 November, 2016, 9:54pm

The Chinese central bank is reported to be preparing even broader assessment of banks’ off-balance-sheet activities, particularly their wealth management products (WMP) – in another move to rein in the shadow banking sector, widely considered as the biggest risk facing the country’s financial system.

Ma Jun, chief economist at the People’s Bank of China, remained tight lipped last week on when any further measures might start.

But he did concede, in no uncertain terms, that various data has already been collected, testing procedures are in progress, and plans are afoot.

“The rapid growth of some banks’ off-balance WMPs need to be given more attention, to better evaluate the impact of the banking business on the economy. Oversight of them should be tightened,” said Ma.

The PBOC currently evaluates all banks based on the assessment of 14 metrics including broad-based credit growth under the Macro Prudential Assessment (MPA) framework.

Banks with overly excessive credit growth are penalised by the central bank. However, the current assessment of broad-based credit growth does not include WMPs.

The central bank introduced the MPA framework in 2015, expanding its focus from loans to credit in a broader sense, covering not only loans but also banks’ bond investments, equity rights and other investments and financial assets.

The MPA framework makes it more difficult for banks to adjust on-balance-sheet assets to circumvent the government’s credit controls.

Any further tightening would make it more difficult for banks to move assets off-balance-sheet.

China’s shadow banking business ballooned 19 per cent in the first half of 2016 compared to a year earlier to 58 trillion yuan, which is the equivalent of 82 per cent of the country’s GDP, according to statistics from Moody’s Investors Service.

“The speed of growth, particularly of the less transparent WMPs is fueling concern that it is becoming more difficult for state banks to replace the current credit,” Michael Taylor, managing director and chief credit officer for Asia Pacific at Moody’s, told South China Morning Post.

The speed of growth, particularly of the less transparent WMPs is fueling concern that it is becoming more difficult for state banks to replace the current credit
Michael Taylor, managing director and chief credit officer, Asia Pacific, Moody’s

Assets funded by WMPs have been an especially fast-growing component of the shadow banking sector, accounting for 44 per cent of total transactions values at the end of the first half, according to Moody’s.

Over the past couple of years, smaller Chinese banks have ramped up their shadow lending activities and staffing, and so analysts say it’s those operators who have the most to fear, as they are particularly exposed.

Richard Xu, an analyst at Morgan Stanley, predicts in his latest research note that any new rules appear likely to be intended to control WMP growth, rather than lower outstanding WMP balances.

He named Mingsheng and Ping An banks – which like other smaller banks are more inclined to shift some credit-type assets to off-balance-sheet WMP investments as part of their channel business, driven by profit growth and capital adequacy considerations – as two likely to be significantly impacted.

According to Morgan Stanley, the average annual growth in off-balance-sheet WMPs by smaller shareholding banks and city commercial banks was 80 per cent in the first half of this year, compared with 54 per cent for the so called “Big Five” state-owned lenders.

The MPA framework requires banks’ overall credit growth to be no more than 22 per cent higher than the country’s M2 growth rate.

The smaller shareholding banks have been aggressive in developing WMPs, and if these were now included in the broader oversight, it could instantly make their credits exceed the ceiling by 1.5 trillion yuan, according to a report from China International Capital Corp.

Rapid expansion of the shadow banking sector has been raising concerns among analysts for the past year.

Problems in the shadow banking sector could lead to liquidity shocks which could spread to the rest of the banking system through the interbank market, said Moody’s.

The reported new measures, if confirmed, would be the latest move by the Chinese authorities after a draft rule over WMPs released by the country’s banking watchdog the China Banking Regulatory Committee (CBRC) in July this year.

The potential action from the PBOC, said Morgan Stanley, “indicates the regulator’s continued efforts to improve transparency of credit growth in China and contain rational credit supply”.

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