Fitch: Chinese Credit Data Increasingly Distorted by Informal Securitisation

Link to Fitch Ratings' Report: Chinese Banks: Informal Securitisation Increasingly Distorting Credit
Data

Fitch Ratings-Beijing/Hong Kong-14 July 2010: Fitch Ratings has commented today in a just published
Special Report that the growing popularity of informal securitisation, or the re-packaging of bank loans into
investment products, is increasingly distorting Chinese banks' credit data at an institutional and system
level, resulting in pervasive understatement of credit growth and credit exposure.

Adjusted for informal securitisation activity, the agency estimates that the net amount of new CNY loans
extended by Chinese banks in H110 was closer to CNY5.9trn, or more than one-fourth above the official
figure of CNY4.6trn. By end-H110, Fitch estimates that upwards of CNY2.3trn in outstanding credit was
sitting off the balance sheets of Chinese banks in investment products, up more than tenfold from end-2007.

"This activity accelerated significantly in H110, fuelled by a convergence of interests between banks eager
to adjust loan balances to meet regulatory requirements and investors keen on higher-yielding investments,"
said Charlene Chu, Head of Fitch's Chinese bank ratings.

In early July, the China Banking Regulatory Commission (CBRC) placed a temporary ban on informal
securitisation. Whether the prohibition ultimately will become permanent and what, if any, forms of
activity will be exempt have yet to be officially decided. Nevertheless, the agency views the measure as a
positive step towards preserving China's financial sector stability.

"It is encouraging to see that the CBRC has taken notice, and is moving aggressively to slow this activity,"
Chu said.

The agency noted that its greatest concerns about informal securitisation currently centre on liquidity risk,
and the growing potential liabilities Chinese banks are taking on in these transactions. Credit-backed
investment products are frequently marketed as substitutes for bank deposits, and investors commonly
believe there is an implicit commitment from banks to repay investors upon maturity. However, these
implicit obligations currently are not included in financial statements, and represent a hidden call on
liquidity.

"A key misconception about this activity is that as long as the quality of the investment products'
underlying assets remains strong, there is nothing to worry about," said Chu. "But in fact, these products
are frequently managed by banks on a pooled basis, and therefore the greatest risk lies in the management
of cash flows, and the ability of Chinese banks to meet future repayments to investors."

The report entitled, "Chinese Banks: Informal Securitisation Increasingly Distorting Credit Data", is
available on www.fitchratings.com.

Contact: Charlene Chu, Chunling Wen, Hiddy He, Beijing, Tel: +8610-8567-9898; Jonathan Cornish, Hong
Kong, Tel: +852-2263-9901.
Media Relations: Karen Cho, Hong Kong, Tel: +852 2263 9935, Email: karen.cho@fitchratings.com.

Additional information is available at www.fitchratings.com.

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