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Mainland regulators step up hunt for loan quota cheats by chasing off-balance-sheet products
Reuters in Beijing
06 July 2011
Chinese regulators are playing a game of hide and seek with the country’s lenders, trying to uncover deals struck with the intention of evading official loan restrictions.
Though far from easy, the search for “shadow” loans - lending hidden off banks’ balance sheets - is a priority for China’s policy hawks, who worry lending limits are not as tight as they used to be, and that monetary policy is looser than meets the eye.
Unlike other major economies, China relies not on interest rates, but on loan targets as its most potent policy tool. It tells banks how much to lend by lifting or cutting loan quotas.
But China’s solid economy, which buoyed demand for cash, forced banks to get creative and dream up a bevy of back-up financing to bypass loan limits. From designated loans to bank acceptance bills and trust loans, banks are pushing out a wide variety of off-balance-sheet loans, and weakening Beijing’s efforts to contain lending.
“Just look at the amount of cash circulating outside the banking system and you can see the true story,” said Du Zhengzheng, an economist at Bohai Securities in Beijing.
“Firms are turning to non-bank channels to get funds while lenders are rushing into off-balance-sheet products to skirt loan controls.”
Indeed, data show that the proportion of financing accounted for by bank loans on the mainland dropped from 85 per cent in 2008 to just more than half in the first quarter this year.
The off-balance sheet financing boom belies a recent slowdown in bank lending and points to a still-robust appetite for loans.
“Lower growth in loans is caused by monetary policy tightening as of now, not by demand weakening,” said Helen Qiao, an economist at Goldman Sachs.
For China’s central bankers, however, ample credit is not entirely good news. Policymakers have made inflation their top goal, and the extra cash from creative lending could help keep inflation elevated.
To better track the explosion of non-traditional lending, the central bank proposed in February that China’s true monetary conditions be measured using “social financing”, a broad group of credit that includes on- and off-balance-sheet loans and bond and equity issuance.
By this measure, China’s monetary conditions are only a little tighter than in 2010, despite four interest rate rises and nine increases in reserve requirements over the past year. The central bank’s 2011 target for total social financing is 14 trillion yuan, not far off last year’s 14.3 trillion yuan.
That figure will stay high despite Beijing’s efforts to restrain bank lending, bankers said.
China’s bank regulator has made plain its dislike for shadow loans. It has a long-standing order to banks to move trust loans back on their books by the year-end. It made its latest move this week by telling banks to check all bill financing deals, just days after tightening control on wealth management products.