Meet China’s Latest $1.8 Trillion “Problem”
The powers that be in Beijing aren’t particularly keen on allowing the banking sector to report “real” data on souring loans – especially given the fragile state of the country’s economy. In some cases, the Politburo will pressure banks to simply roll over bad debt, effectively kicking the can.
In addition, banks carry around 40% of their credit risk outside of “official loans.” Here’s what Fitch had to say last year:
“Off-balance-sheet financing (I.e. trust loans, entrusted loans, acceptances and bills) accounted for 18% of official TSF stock at end-2014, up from less than 2% just over a decade ago,” Fitch wrote. “Of the off-balance-sheet exposure reported at individual banks, this is equivalent to 15% of total assets for state commercial banks and 25% for mid-tier commercial banks, on a weighted average basis. These ratios would be even higher if we included entrusted loans (see Figure 2), although this information is not disclosed at all banks. Fitch estimates that around 38% of credit is outside bank loans.”
In many cases, channel loans (so credit extended by banks via non-bank intermediaries) are carried as “investments classified as receivables” on the balance sheet.
Now, as more Chinese firms lose access to traditional financing amid rising defaults and increasing economic turmoil, banks are increasingly turning to channel loans as a way of extending credit.
In turn, the amount of “investment receivables” on many mid-tier banks’ books is soaring to dizzying levels. “Mid-tier Chinese banks are increasingly using complex instruments to make new loans and restructure existing loans that are then shown as low-risk investments on their balance sheets, masking the scale and risks of their lending to China’s slowing economy,” Reuters reports. “The size of this ‘shadow loan’ book rose by a third in the first half of 2015 to an estimated $1.8 trillion, equivalent to 16.5 percent of all commercial loans in China.”
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