China Said to Ban Banks Shifting Commercial Bills to Trusts

China’s banking regulator has banned lenders from transferring holdings in commercial bills to trust companies, a person with knowledge of the matter said.

The China Banking Regulatory Commission (CBRZ) aims to prevent practices that skirt regulatory restrictions on credit growth, curb loan risks and better protect investors, the person said, declining to be named because the order isn’t public.

China has tightened oversight of trust companies since 2010 after banks used them to evade loan restrictions imposed to rein in inflation and property prices. Offloading commercial bills to the trusts allowed banks to meet loan-to-deposit ratio requirements and to lend to restricted industries, according to Standard & Poor’s.

“We do see the Chinese regulator increasingly tightening its regulations on the bank trust business on concern that some of the macro measures to counteract inflation last year will not be that effective because of this channel,” Liao Qiang, a Beijing-based director for financial institution ratings at S&P, said yesterday during a conference call.

Commercial bills, which are issued by a company and typically endorsed by a bank, are often used by holders to borrow money from lenders at a discounted value.

Photographer: Nelson Ching/Bloomberg

The China Banking Regulatory Commission aims to prevent practices that skirt regulatory restrictions on credit growth, curb loan risks and better protect investors, the person said, declining to be named because the order isn’t public. Close

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Photographer: Nelson Ching/Bloomberg

The China Banking Regulatory Commission aims to prevent practices that skirt regulatory restrictions on credit growth, curb loan risks and better protect investors, the person said, declining to be named because the order isn’t public.

An earlier Shanghai Securities News report said the regulator banned trust companies from raising money to invest in the commercial bills.

Shadow Banking

Premier Wen Jiabao said last week that China will “decisively” prohibit capital from leaving the real economy for speculative activity. Wen’s comment signaled that the government will act to curb irregular lending and shadow banking, according to Barclays Capital Inc.

China has restricted lending to property developers and to industries that are heavy polluters.

Some banks, mostly large- to medium-sized ones, increasingly used trust companies from the second half of last year to offload their commercial-bill assets and make room for new lending as liquidity tightened and yields on the notes rose, according to Li Yaoshen, Shanghai-based research director at Noah Holdings Ltd. (NOAH), a provider of wealth management services.

“A ban on the practice would have a bigger impact on the banks than the trust companies,” Li said. Shifting commercial- bill assets to trusts “is relatively simple and easy to do. Once it’s cut off, banks will have to think of other ways” to boost lending.

The average expected rate of return on commercial-bill trust products sold after October rose to 7.55 percent, 94 basis points higher than those set up earlier last year, when businesses’ funding difficulties increased, the Shanghai Securities News reported yesterday, citing data from Benefit Wealth, a Chengdu, southwestern China-based company that monitors the sales.

To contact Bloomberg News staff for this story: Dingmin Zhang in Beijing at dzhang14@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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