Entrusted loans drive shadow lending in China as SOEs abuse cheap credit
State-owned firms with access to cheap credit lend to other firms via intermediary banks at high rates as informal lending sector runs wild
Chinese companies are getting more creative in the business of money lending as they struggle to keep profits ticking over in a cooling economy, raising concerns they are adding to the mountain of debt risks building in the world's No 2 economy.
Big state companies in industries struggling with overcapacity but with easy access to credit are borrowing funds, not to invest in their business but to lend to smaller firms, sometimes at several times the official interest rate, part of an informal lending market that mainland authorities are taking aim at.
The People's Bank of China increased pressure on banks to rein in such informal lending and speculative trading last week in money markets, letting short-term interest rates spike to extraordinary levels.
In the US$3.7 trillion "shadow banking" market, the fastest growing area is in so-called entrusted loans, which are arranged by banks on the companies' behalf, and in bankers' acceptance notes, tradeable securities that give a steady flow of cash.
Issuance of entrusted loans and bankers' acceptance notes has more than doubled to 1.6 trillion yuan (HK$2 trillion) in the first four months of this year from 636 billion yuan a year ago.