Mid-tier Chinese banks are increasingly using complex instruments to
make new loans and restructure existing loans that are then shown as
low-risk investments on their balance sheets, masking the scale and
risks of their lending to China's slowing economy.
The size of this ‘shadow loan’ book rose by a third in the first half of
2015 to an estimated $1.8 trillion, equivalent to 16.5 percent of all
commercial loans in China, a UBS analysis shows. For smaller banks, the
rate is much faster.
This growing practice, which involves financial structures known as
Directional Asset Management Plans (Damps) or Trust Beneficiary Rights
(Tb Rs), comes at a time when some mid-tier lenders, under pressure from
China’s slowest economic growth in 25 years, are already delaying the
recognition of bad loans.
“These are now the fastest growing assets on the balance sheets of most
listed banks, excluding the Big Five, not just in percentage terms but
absolute terms,” said UBS financial institutions analyst Jason Bed ford, a
former bank auditor in China who focuses on the issue. “The concern is
that the lack of transparency and sim-categorization of credit assets
potentially hide considerable non-performing loans.” To provide a buffer
against tough times, banks are required to set aside capital against
their credit assets — the riskier the asset, the more capital must be
set aside, earning them nothing.
