China rust-belt banks ‘at centre’ of murky world of shadow banking
Some banks in nation’s ailing northeast using various methods to get round restrictions on their lending, increasing risk of defaults on loans, according to analyst
Regional banks in China’s rust-belt provinces are driving the rapid expansion of shadow banking in the country, fuelling a web of informal lending that poses wider risks to the financial system, according to a study by the financial services company UBS Group.
Smaller rust-belt banks like Bank of Tangshan and Baoshang Bank have been using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions, the study by analyst Jason Bedford said.
Others have been using the shadow loan instruments to diversify away from lending in their struggling home provinces, exposing themselves to a much wider spectrum of Chinese corporate risk in the event of a default, according to the report.
By analysing 237 Chinese banks, many of them small and unlisted regional lenders, Bedford casts a new spotlight on underground financing and the risks it poses to the nation’s US$35 trillion banking industry. Shadow loans grew almost 15 per cent to 14.1 trillion yuan (US$2.3 trillion) by December from a year earlier, equal to about 19 per cent of economic output, he estimates.
“This is a sleeper issue,” Bedford wrote. “The remarkable level of concentration in regional banks in rust-belt region banks, combined with evidence that these assets are increasingly being used to roll over loans to existing borrowers as well as being swapped between banks without a clear transfer of risk are alarming.”