Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Credit is a risky business, but loans that dare not speak their name? They are possibly even more dangerous, as China is about to find out.

As many as 15 publicly traded Chinese lenders, large and small, report roughly $500 billion of such debt between them, which they hold not as loans but as receivables from shadow banking products. While the traditional credit business of these banks is 16 times bigger, receivables have jumped sixfold in three years. Explosive growth of this type usually ends badly. It's hard to see why it'll be different for the People's Republic.

China's Hidden Loan Boom
Banks' receivables from wealth management products, trusts and other unlisted securities jump 6-fold
Source: Company annual reports and share-sale prospectuses; Bloomberg

Before they can brace themselves -- or embrace the risk, if they think the rewards are worth it -- equity investors need to know where to look. Flitting from one explanatory note to another in dense annual reports isn't everybody's idea of a day well spent. But the effort may be worth it. For instance, page 184 of Agricultural Bank's 2015 annual report informs us that the bank has 557 billion yuan ($85 billion) worth of assets tied in "debt instruments classified as receivables." On page 245, we further learn that most of this is old hat, and the only fast-growing portion is an 18.7 billion yuan chunk helpfully titled as "Others."  

A footnote adds that the category primarily consists of "unconsolidated structured entities managed by the group." Give up? Then you miss the big reveal that occurs 34 pages later: 

The unconsolidated structured entities managed by the Group consist primarily of collective investment vehicles (“WMP Vehicles”) formed to issue and distribute wealth management products (“WMPs”), which are not subject to any guarantee by the Group of the principal invested or interest to be paid.

That's broadly how Chinese lenders disclose their cryptic linkages with shadow banks. The names keep changing, from "investment management products under trust scheme"  and "investment management products managed by securities companies" to "trust beneficiary rights" and "wealth management products." The latter have swelled to the equivalent of 35 percent of GDP, and account for 3 trillion yuan of interbank holdings. The common thread to these products is that they're all exposed to corporate credit and designed to get around lenders' minimum capital requirements and maximum loan-to-deposit norms , with scant loss provisioning in case things go wrong.

There's plenty that could. The reported nonperforming loan ratio of 1.75 percent is a joke. CLSA says bad loans have already snowballed to 15 to 19 percent of the loan book; Autonomous Research partner Charlene Chu estimates the figure will reach 22 percent by the end of this year. A 20 percent loss on a $500 billion portfolio of loans masquerading as receivables would wipe out 58 percent of annual profit of the 15 banks under our scanner.

Fluffy Premium
Investors are far from punishing mid-tier bank for their outsize loans-as-receivables exposure
Source: Bloomberg
*China Merchants; China Minsheng; China Everbright (market-cap weighted average) **ICBC: China Construction Bank; AgBank; Bank of China (market-cap weighted average)

The biggest chunks of pretender loans show up at mid-tier banks such as China Merchants, Everbright Bank and Minsheng. A market capitalization-weighted index of the trio is trading at a "premium" price-to-book value of 0.96, while the big four banks languish at 0.73. The equity market hasn't grasped the danger posed by loans that won't dare their speak their name. Either that, or investors believe that securities floated by other financial institutions are safer than loans to real businesses. That wasn't true for the U.S. in 2008. It won't be true in China now.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. China scrapped the longstanding loan-to-deposit requirement last year, by which time loans as receivables had already ballooned.

To contact the author of this story:
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Matthew Brooker at