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Shadow Financing by Chinese Banks Deepens Prevailing Credit Mystery

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Published on : Sep 24, 2015

Riskier banks in China have increased their investment of customer funds in financing that is not depicted in their loan books, making it more difficult for the rating companies to assess their asset quality. 

Analysts from Moody’s Investors Service have noted a surge in balance-sheet items called receivables, which frequently comprise shadow funding such as wealth products and trusts. Speaking about the prevailing condition, Fitch Ratings said that it makes it difficult for analysts to comprehend the escalation in activity. 

Listed banks in China, excluding the Big Four, registered short-term investments and other assets – which also comprised receivables – rose by 25% in the first half, compared to the overall asset growth of 12%, as per the data compiled in the Bloomberg show. 

China is the second largest economy in the world, and its slow rate of growth together with “still significant” credit growth has impelled Standard & Poor’s to relegate its view about the economic risk of the banking industry to negative, from its stable status this week. Shadow finance assets, which was estimated to be around 41tn yuan ($6.4tn) by Moody’s during the last quarter of 2014, have emerged as more lucrative options with five interest-rate cuts by the central bank of China since the last November. 

One of the senior directors at Fitch in Hong Kong Grace Wu said that they are concerned about how some of the investment positions in a handful of banks are using the aforementioned methods as a way to evade banking restrictions. This lending are not reported into loan provisions, unlike the transparent bank loans, hence it becomes even more difficult to ascertain the asset quality of the same. The opacity of credit exposures in Chinese banks enumerates why these banks adopt a pricing pattern that depicts as if they are anticipating a non-performing loan ratio between 10% and 12% the following year. This will exhibit a “sizeable credit crisis” across other countries.