High-Risk ‘Shadow’ Credit in China Put at $2.9 Trillion by IMF

International Monetary Fund staff said that 19 trillion yuan ($2.9 trillion) of Chinese “shadow” credit products are high-risk compared with corporate loans and highlighted the danger that defaults could lead to liquidity shocks.

The investment products are structured by the likes of trust and securities companies and based on equities or on debt -- typically loans -- that isn’t traded, staff members John Caparusso and Kai Yan said in a report released Friday.

The commentary highlighted the potential for risks bigger to the nation’s financial stability than from companies’ loan defaults. While loan losses can be realized gradually, defaults on the shadow products could trigger risk aversion that’s harder to manage, the report said.

The “high-risk” products offer yields of 11 percent to 14 percent, compared with 6 percent on loans and 3 percent to 4 percent on bonds, the commentary said. The lowest-quality of these products are based on “nonstandard credit assets,” typically loans, it said.

In a separate document in a bundle released by the IMF, the Chinese banking regulator was cited as saying that banks’ exposures to “nonstandard credit assets” were a key concern, with moves already made to require higher provisioning against such exposures than for regular loans.

Chinese banks’ capital ratios are sufficient and stable, the regulator was cited as saying.

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