Loose credit policy increases risk in China, Nomura warns

Risks were accumulating in the mainland's trust loans and wealth management products, with more scandals like that of Huaxia Bank expected to emerge next year, a top economist at Nomura Securities said.

Zhang Zhiwei, chief China economist at Nomura, said the mainland's loose credit policy would increase financial risk in the economy, given the surge in the past few months in trust loans - which are made through a kind of wealth-management company - and the unrealistically high returns promised by infrastructure or property construction projects funded by those loans, as well as banks' wealth management products.

"The size of trust loans increased by around 200 billion yuan (HK$246 billion) monthly in recent months, while the expected returns, usually 8 per cent to 10 per cent, are too high for the funded infrastructure projects, which are unlikely to achieve such returns," Zhang said yesterday. Trust loans advanced in the first eleven months totalled 1.03 trillion yuan, surging from 203.4 billion yuan a year earlier, according to the central bank.

Zhang's comments come after more than 40 depositors protested against alleged malfeasance by Huaxia Bank at a Shanghai outlet last week.

The lender told them that a wealth management product sold to them last year - which promised an annual interest rate of 11 per cent - would be defaulting on its repayment.

"The case of Huaxia Bank is the beginning. We will see more such problems emerging in the first half of next year," Zhang said.