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Categorized | Banks

China warns over risky investment products

Posted on September 26, 2016

epa00885528 A bank teller counts Chinese 100 yuan notes at a branch of the China Merchants Bank in Beijing, Friday 15 December 2006. US officials continue to claim that the Chinese yuan is undervalued as US Treasury Secretary Henry Paulson visits Beijing this week for the US-China Strategic Dialogue. EPA/MICHAEL REYNOLDS©EPA

China’s banking commissioner has warned the country’s city banks over the hidden credit risks related to the mid-tier lenders’ aggressive push into investment products.

City commercial banks — the fastest growing segment of China’s banking industry — have been flagged by analysts as a potential hotspot for stress in the financial system.

    For some of the lenders, the rate at which they have invested in opaque financial products has outpaced growth in traditional lending. Other municipal banks have suffered fraud cases that have left holes in their balance sheets.

    The banks must reverse the trend in which investments have surpassed lending, Shang Fulin, the head of the China Banking Regulatory Commission, warned a meeting of city lenders in southern China, noting that complex, highly leveraged products had led to the global financial crisis.

    “The rapid development of these businesses actually signals a hidden credit risk that could influence financial stability,” Mr Shang said, according to a transcript of the speech.

    China’s banking system is beset with bad debt. While the official non-performing loan ratio remains below 2 per cent, many analysts have suggested that the true figure is nearly 10 times that rate. At the same time, profit growth has stalled or fallen at many lenders as they step up write-offs for bad debt.

    The distress has been magnified at many city banks. Growth in pre-tax profit for 2015 fell more than 90 per cent year-on-year at Bank of Dalian, a city commercial bank based in China’s north-east, according to a report from UBS. A handful of other similar banks saw profit growth decline at least 30 per cent compared with the previous year.

    Over the same period, the same banks have ramped up risky investments in an attempt to underpin growth. Bank of Ningbo, based in a city on China’s eastern coast, had invested about 30 per cent of its total assets in other bank’s wealth management products (WMPs) by the end of 2015, according to data from BMI Research.

    “At a time when there is an increasing lack of profitable opportunities for Chinese banks, they have been partially relying on WMPs (both investing in them and earning commission fees) in an attempt to support earnings,” according to the BMI report.

    “Investment receivables” or “debt receivables”, which are structured to appear as holdings of investment products issued by third parties but are often based on loans that originate at the bank that claims them as receivables, have jumped in recent years. According to an analysis of 103 Chinese banks by Wigram Capital Advisors, those investments have increased 63 per cent to Rmb14tn ($2.16tn) last year, equivalent to 16.5 per cent of total formal lending.

    Total assets at city commercial banks grew 24 per cent year-on-year in July, according to the banking regulator — much faster than joint stock banks or national state banks.