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GLOBALBUSINESS

LoanPracticesofChinasBanksRaising
Concern
ByDAVIDBARBOZA

JULY1,2013

SHANGHAITextmessagesolicitationsbeganarrivingonthemobilephonesof
manyofChinaswealthylastmonth,promisingaccesstolucrativewealth
managementproductswithyieldsfarabovethegovernmentsbenchmarksavings
rate.
Onemessageread:ChinaMerchantsBankwillissueahighinterest
financingproductstartingfromJune28thto30th.Theproductwillbe90days
witha5.5%interestrate.Pleasecallusnow.
Adaylatercameanother.Warmreminder:Theinterestrateofyesterdays
producthasbeenraisedto6%.(Productdurationis90days).Thereislimited
accesstothisproduct.Firstcomefirstserved.
TheoffersarenotcomingfromflybynightoperatorsbutsomeofChinas
biggestbanks.Theyareraisinghugepoolsofcashtofinancearelativelynewand
highlyprofitablesidelinebusiness:lendingoutsidethescrutinyofbank
regulators.
Thecomplexwaytheygoaboutmakingoffthebalancesheetloansisatthe
heartofChinas$6trillionshadowbankingindustry,whichthegovernmentis
nowtryingtotame.Effortstoreininthedodgylendingpracticesrattledstock
marketsworldwideinlateJune.
Chinasregulatorsandafairnumberofeconomists,policymakersand
investorsworrythatlegitimatebanksareusinglightlyregulatedwealth

managementproductstorepackageoldloansandpropupriskycompaniesand
projectsthatmightnototherwisebeabletoborrowmoney.
Analystswarnthatshadowbankingishelpingdrivetherapidgrowthof
creditinaweakeningeconomy,whichcouldleadtointheworstsituationa
seriesofbankfailures.ThisisthebiggestuncertaintyIveseeninmy18years
followingtheChinamarket,DongTao,aneconomistatCreditSuisse,saidof
shadowbanking.Youdontknowhowbanksaredeployingcapital.Andyou
dontknowthecreditrisks.
Whatbanksaredoing,analystssay,ispressingcustomerstoshiftmoneyfromthe
old,regulatedpartoftheiroperationssavingsdepositsintothenew,less
regulatedpartconsistingofhighyieldingwealthmanagementproductsthatcan
circumventgovernmentinterestratecontrolsandbeusedtofinancehighinterest
loanstodesperatecustomers.
Chinasleadersaresoworriedaboutcreditriskthatlastmonththecountrys
centralbanktightenedcreditintheinterbankmarket,wherebankstypicallygoto
borrowmoneyfromotherbanks.
Themovesentshortterminterestratessoaring,andforadayatleast,
createdadebilitatingcreditsqueeze.
ThestockmarketsinChinacalmeddownlastweek.Butfinancialinstitutions
arehintingthatcashisstillhardtocomeby.Somebankstemporarilysuspended
lendinginordertopreservecash,accordingtoCaixin,theChinesebusiness
magazine.
Otherbanksareraisingcashbyofferinganewslateofwealthmanagement
products.NearlyeverymajorChinesebanksoldashorttermwealthmanagement
productthathadtobecompletedbytheendofJune,accordingtoatelephone
survey.ChinaMerchantsBankdidnotrespondtorequestsforaninterview.
Manyoftheinvestmentspay6percentannualinterest,whichisfarabove
thehighestsavingsdepositratesetbybankregulators:3.3percent.
Consumerswithdrawmoneyfromtheirregularsavingsaccountandputit
intoawealthmanagementproductthatpromisesamuchhigherrate.Usually
bankswillhavehigheryieldingproductsattheendofeachquarter,saidWang

Yanan,a24yearoldaccountantwhoworksinShanghai.IfIhappentohave
moneyatthosemoments,Illbuysome.
Thoughtheproductsarepopular,theirdisclosureisoftenpoor.Bank
employeesinsisttheprincipalisguaranteed,butcontractsforwealth
managementproductsareusuallyvague,simplynotingtherecouldberisk.Most
offerlittledetailaboutwherethemoneywillbeinvested.
Muchofthemoney,analystssay,islenttopropertydevelopersandlocal
governmentfinancingvehicles,areasthathavegovernmentofficialsworried
becauseofanexplosioninpropertydevelopmentandsoaringhousingprices.
Regulatedbankswillnotmaketheloansbecausetheborrowersaretoorisky.
Sotheloansareoftenmadeoffthebalancesheet,andthereforeoutsidethe
purviewofbankregulators,whichiswhyexpertscallitshadowbanking.Theyare
madeathigherinterestrates,soeveryonewinstheborrower,thebanksand
theinvestorofthewealthmanagementproductaslongastheborrowerrepays.
Thebanksnowhavethesedarkpoolsofmoney,saidJoeZhang,aformer
investmentbankerandtheauthorofInsideChinasShadowBanking:TheNext
SubprimeCrisis?Hesaid,Tofinancedealstheyusuallyhaveatrustcompany
standinthemiddleandsimplyputtheirstamponit.Thetrustcompaniesgeta
feeforthatbutoftentheydonexttonothing.Thebankdoesallthework.
Theexplosivegrowthofwealthmanagementproductsbeganaboutfiveyears
ago,enticingChinesebanks,bigandsmall,toengageinshadowbanking.
Bytheendoflastyear,Chinasshadowbankingactivitywasvaluedat$6
trillion,twicethelevelin2010,andnowequalto69percentofChinasgross
domesticproduct,accordingtoareportreleasedinMaybyJPMorganChase.
Now,evenstaterunbanksaredoingshadowlending,extendingfinancingto
companiesinhighrisksectors.
Whoisresponsiblefortheloansisnotalwaysclear,andthatswhere
everyonestartsgettingnervous.
Ifawealthmanagementproductdefaults,whoisonthehook?asked
MichaelPettis,afinanceprofessoratPekingUniversityinBeijingandsenior

associateattheCarnegieEndowmentforInternationalPeace.Itsallvery
murky.Inthesethings,thebanksaretechnicallyactingasintermediaries.
Financialexpertsworryaboutthelackoftransparencyinthemarketwhen
Chinaseconomyisweakening.Theyalsofretaboutwhethersomeborrowers
havethecashflowtorepaytheirloans.
FitchRatings,thecreditratingsagency,beganwarningtwoyearsagothat
wealthmanagementactivitycarriesuniqueliquidityandcreditrisks.Butthe
lendingcontinuedandincreased.
Inanewspaperopinionpiecelastyear,XiaoGang,thenheadoftheBankof
China,aleadingcommercialbank,andnowthenationstopsecuritiesregulator,
referredtoshadowbankingasfundamentallyaPonzischeme.
Thegovernmenthassofartoleratedshadowbankingbecausegettingridofit
isallbutimpossible,analystssay.Wealthycustomersareaccustomedtogetting
betterreturns,andalargesegmentoftheeconomyisdesperateforcapitaland
cannoteasilygainaccesstoregularbankloans,largelybecauseofgovernment
restrictions.Buttheyarewillingtopaytheshadowbanks9,10,even15percent
interest.
Andtomakethatpossible,Chinasbanksareraisingpoolsofcapitaland
creatingincreasinglycomplexfinancialinstrumentswithoutsideinstitutionsto
makeoffthebooksloanstothosewillingtopayapremium.
Perhapsthebiggestworry,though,isthatthisboomingpracticecouldbe
undonebyamajorbusinessfailurethatforcesbankcustomerstosufferlosses.
Thisisamajorproblem,saidDingShuang,aCitigroupanalystbasedin
HongKong.Manyofthesearejustthreemonths,andtheyneedtoberolled
over.Soiftheresadefaultthatcouldchangethings.Thisisaproblemregulators
areveryawareof.
AversionofthisarticleappearsinprintonJuly2,2013,onpageA1oftheNewYorkeditionwiththe
headline:LoanPracticesOfChinasBanksRaisingConcern.

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