China Risks $375 Billion of Shadow Banking Losses, CLSA Says

Updated on
Bad Loans Pile Up at Chinese Banks
  • Bad-debt ratio for bank shadow financing estimated at 16.4%
  • Shadow financing described as ‘banking reform gone wrong’

China’s shadow banking could lead to losses of $375 billion, according to CLSA Ltd. estimates of likely levels of bad debt.

The brokerage estimated the potential bad debt ratio for “bank-related shadow financing” at 16.4 percent, or 4.2 trillion yuan, in a report released to the media in Hong Kong on Tuesday. Assuming a 40 percent recovery rate left a potential loss of 2.5 trillion yuan.

“Shadow financing is banking reform gone wrong given that the key driver of growth has been the banks circumventing regulations to protect their margins,” analyst Francis Cheung wrote in the report. “Shadow financing has grown rapidly, benefiting from implicit government guarantees despite being a channel for credit to higher-risk industries.”

The report was a follow-on from CLSA estimates in May that bad debt on banks’ regular loan books could be at least nine times higher than official numbers, with potential losses of more than $1 trillion.

Wealth Products

Shadow financing -- including loans facilitated by trust firms, banks’ wealth management products, and asset management plans sold by securities, insurance and mutual fund firms -- expanded at an annual 30 percent pace from 2011 through 2015 to reach 54 trillion yuan, or 79 percent of China’s gross domestic product, CLSA estimated.

QuickTake Q&A: Don’t Say You Weren’t Warned About China’s WMPs

While China’s shadow-financing system is smaller and less complex than in developed markets, challenges include poor disclosure that hampers retail investors’ assessment of risks, the analysts said.

The nation’s debt-to-gross domestic product ratio may blow out to 321 percent in 2020 from 261 percent in the first half of this year, assuming a 6.5 percent annual economic growth rate, CLSA said.

— With assistance by Jun Luo

Before it's here, it's on the Bloomberg Terminal. LEARN MORE