China to ‘Strictly Control’ Shadow Banking Risks, Liu Says

China Banking Regulatory Commission Chairman Liu
Liu Mingkang, chairman of the China Banking Regulatory Commission. Photographer: Simon Dawson/Bloomberg

China’s banking regulator sought to ease concerns about the health of the nation’s lenders and the informal lending market, vowing to control risks and stressing measures already taken by the government are showing results.

Ratings companies and investment analysts have “underestimated” the nation’s determination and ability to carry out reforms, and are “talking down” the nation’s economy and banking industry, Chairman Liu Mingkang said, according to a transcript of a speech he gave that was posted on the website of the China Banking Regulatory Commission. The regulator is paying “great attention,” Liu said.

Premier Wen Jiabao last week pledged more support for smaller companies after media reports highlighted a credit squeeze that has driven many businesses to the so-called shadow banking system to obtain loans. More than 80 businessmen in the eastern city of Wenzhou have disappeared, committed suicide or declared bankruptcy to avoid repaying debts to informal lenders, the official Xinhua News Agency reported on Oct. 12.

“The authorities want to monitor the situation to ensure localized distress remains localized and treatable with sector-specific measures,” said Tim Condon, Singapore-based head of Asian research at ING Groep NV and a former World Bank economist. “Monetary tightening will ultimately spread to the shadow banking system and we’re seeing the results of this in Wenzhou.”

Bank Shares Drop

The People’s Bank of China has raised interest rates five times in the past year and restricted lending to cool inflation. Liu acknowledged that the tighter liquidity has “spawned various shadow banking activities,” which the regulator will “strictly control.”

Shares of China’s banks fell less than the benchmark Shanghai Composite Index today. Industrial and Commercial Bank of China Ltd. declined 0.24 percent, China Construction Bank Corp. dropped 1.1 percent, Agricultural Bank of China Ltd. fell 1.2 percent and Bank of China Ltd. declined 1.3 percent as of the 11:30 a.m. trading break. The index fell 1.95 percent.

State-run fund Central Huijin Investment Ltd. said last week it would start increasing its holdings in the nation’s four biggest state-owned commercial banks after their shares dropped on concerns that bad debts are increasing on loans to property developers and companies set up by local governments to build infrastructure.

Monitoring Shadow Banking

The central bank put the size of private lending at 3.38 trillion yuan ($530 billion) as of May based on an investigation it carried out in June, the 21st Century Business Herald reported today, citing an unidentified person close to the monetary authority. The PBOC plans a second probe and may introduce a monitoring system, according to the newspaper. A press official at the central bank declined to comment on the report.

UBS AG economist Wang Tao estimated private lending may be as much as 4 trillion yuan, or 10 percent of gross domestic product, according to an Oct. 11 note to clients.

The central bank’s introduction this year of an aggregate financing measure, designed to capture other funding sources in the economy including bond and stock issues and banks’ off balance-sheet loans, “is an explicit recognition of the importance of the shadow banking system,” ING’s Condon said.

In his speech, Liu also cited the debts of local government financing vehicles and property developers as concerns, according to the transcript.

Hidden Risks

“It’s undeniable that the lack of supervision and management of local government financing vehicles have created some hidden risks,” Liu said.

Local governments, barred from directly selling bonds and taking bank loans, have set up thousands of companies to raise money to fund investment in roads, sewage plants and subways. A report by the nation’s audit office in June found more than 6,576 local government financing vehicles had outstanding debt of 10.7 trillion yuan.

Concerns are also growing that the government’s crackdown on the real-estate industry, continued tightening to rein in inflation that hit a three-year high in July and slowing economic growth will leave many companies unable to pay back their loans.

Chinese developers face an “increasingly severe” credit outlook and a 30 percent decline in sales may leave many facing a liquidity squeeze, ratings company Standard & Poor’s said last month.

Wenzhou ‘Hysteria’

Banks’ overall bad debt ratio on real-estate lending is lower than 2 percent and recent stress tests show that they can withstand a 40 percent decline in property prices, Liu said yesterday. Property lending accounted for 19.8 percent of total outstanding loans at the end of August, he said.

The worst of the “panic and hysteria” over informal lending in China may be over as the city of Wenzhou works with businesses and the central government to stabilize credit, UBS’s Wang said in her note.

“The size of informal lending is relatively small and the concerns about the direct impact on the formal banking sector and the economy are exaggerated,” Hong Kong-based Wang said. The “bigger risks are credit withdrawal in both the formal and informal lending market and contagion,” she said.

— With assistance by Jing Jin

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