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China Said to Order Banks to Book Trust Company Loans

Agricultural Bank of China
A customer exits a branch of the Agricultural Bank of China Ltd. in Beijing, China. Photographer: Nelson Ching/Bloomberg

China’s banking regulator ordered banks to transfer off-balance-sheet loans onto their books and make provisions for those that may default, three people with knowledge of the situation said.

The assets linked to wealth management products provided by trust companies must be shifted onto banks’ balance sheets by the end of 2011, the people said, declining to be identified as the matter isn’t public. Lenders should prepare provisions equal to 150 percent of potential losses, they said.

China’s move may increase pressure for capital-raising at the country’s banks, which Fitch Ratings last month said had more than 2.3 trillion yuan ($339 billion) of off-balance sheet assets. It also underscores concerns about the health of the banking industry after a person with knowledge of the matter said regulators last month ordered lenders to conduct stress tests to gauge the impact of a 60 percent drop in home prices.

The regulator’s order “will plug the loophole that more and more banks now employ to get around government lending curbs,” said Liao Qiang, a Beijing-based analyst at Standard & Poor’s. Bringing loans back on to the balance sheet will restrict banks’ ability to expand lending while “their capital requirement will increase,” Liao said.

Larger banks will be required to maintain the mandated capital adequacy ratio of 11.5 percent after taking the off-balance-sheet loans back onto their books, the people with knowledge of the matter said. Smaller Chinese lenders are required to meet a 10 percent ratio.

Global Push

Banking stocks gained in early trading in Shanghai after tumbling yesterday. Industrial & Commercial Bank of China Ltd., the nation’s largest, rose 0.2 percent to 4.16 yuan as of 10:50 a.m. and China Minsheng Banking Corp. gained 1.1 percent after reporting first-half profit rose to 8.9 billion yuan, beating analysts’ estimates.

A China Banking Regulatory Commission press official, who declined to be identified because of the agency’s rules, confirmed the regulator sent a notice on cooperation between banks and trust companies. The regulator will make a public statement soon, she said, without giving a specific time period.

Limited Impact

“They want to strengthen their monitoring of the systematic risk related to off-balance sheet management of bad debts,” said Wang Qing, Hong Kong-based economist at Morgan Stanley. “In the near term, the impact on banks’ earnings will be quite limited.”

Globally, regulators are pushing banks to increase capital and improve the quality of their balance sheets in the wake of the credit crisis, which forced dozens of U.S. and European banks to accept state bailouts. A report by bankruptcy examiner Anton Valukas into the collapse of Lehman Brothers Holdings Inc. found the investment bank used off-balance sheet transactions to downplay its leverage in 2007 and 2008.

The Basel Committee on Banking Supervision last month proposed restrictions on how much banks can borrow in order to rein in their risk-taking.

Chinese banks last year extended a record $1.4 trillion of new loans, and regulators are concerned defaults may rise as the economy slows. Data yesterday showed Chinese property prices rose at the slowest pace in six months in July after the government cracked down on speculation to prevent asset bubbles.

“The regulators are concerned about non-performing loans, but they are also concerned about growth,” Lu Ting, a Hong Kong-based economist at Bank of America Corp., said in a Bloomberg TV interview. “It’s impossible for them to cut off loan supply in the next few months.”

Fund Raising

China aims to cap new loans at 7.5 trillion yuan this year and lenders have advanced 4.6 trillion yuan in the first half. New loans amounted to 532.8 billion yuan last month, the central bank said today.

Standard & Poor’s said on July 23 banks will need to raise more funds to cope with tighter capital requirements and loan growth. A week earlier, Fitch said first-half Chinese lending was higher than official data suggest as more loans were repackaged into investment products.

The nation’s five largest banks, including Agricultural Bank of China Ltd., are raising more than a combined $60 billion to replenish capital, which would bolster their ability to absorb bad loans after last year’s record new loans.

China’s benchmark Shanghai Composite Index dropped 2.9 percent yesterday, the most in six weeks, after slower-than-estimated import growth fueled concern the world’s third-largest economy is losing steam. Imports expanded 22.7 percent in July, less than the 30 percent median estimate of 29 economists in a Bloomberg survey.

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