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UBS analyst Jason Bedford’s August 23 report on shadow loan books at Chinese banks is a fine piece of work, reviewing the financials of 237 banks across China to understand shadow lending and the threats it represents.
But the single most eye-watering piece of information comes 13 pages in, where Bedford looks at an Inner Mongolian (that is, still mainland Chinese) lender called Baoshang Bank. “The largest borrower in the bank’s shadow loan book had borrowings equivalent to 126% of Baoshang Bank’s net assets at Q1 17,” he writes.
Just to spell that out, that means the bank effectively lent one and a quarter times its own entire net assets to one borrower. The China Banking Regulatory Commission has a clearly stated limit of 15%.
Troubling though that is, Bedford does not yet see a systemic crisis coming, despite the fact that system-wide shadow loans – more specifically, trust beneficiary rights products and directional asset management plans – were worth Rmb14.1 trillion ($2.14 billion) at the end of 2016, equivalent to 18.9% of China’s GDP.
Previous estimates taking a broader definition of shadow financing have been much higher: CLSA’s Francis Cheung said Rmb54 trillion last year, or 79% of GDP. With many banks using these products to originate loans that are on-sold to other banks, there is a real risk of contagion between institutions. Banks have already begun lodging law suits against each other in defaults. Unwinding at least some of these exposures is vital.
