Jul 03, 2013

    China shadow banking fuels uncertainty

    TEXT-MESSAGE solicitations began arriving on the mobile phones of many of China's wealthy last month, promising access to lucrative wealth-management products with yields far above the government's benchmark savings rate.

    One message read: "China Merchants Bank will issue a high-interest financing product...from June 28 to 30. The product will be 90 days with a 5.5 per cent interest rate. Please call us now."

    The offers are not coming from fly-by-night operators, but some of China's biggest banks.

    The complex way they go about making off-balance-sheet loans is at the heart of China's US$6-trillion (S$7.6-trillion) shadow-banking industry. Efforts to rein in the dodgy lending practices put stock markets worldwide in a tizzy late last month.

    China's regulators - and a fair number of economists, policymakers and investors - worry that legitimate banks are using lightly regulated wealth-management products to repackage old loans, and prop up risky companies and projects that might not otherwise be able to borrow money.

    Analysts warn that shadow banking is helping fuel the rapid growth of credit in a weakening economy, which - in a worst-case situation - could lead to a series of bank failures.

    "This is the biggest uncertainty I've seen in my 18 years following the China market," Credit Suisse economist Dong Tao said of shadow banking. "You don't know how banks are deploying capital. And you don't know the credit risks."

    Analysts say that banks are pressing customers to shift money from an old, regulated part of their operations - savings deposits - to a new, less-regulated part consisting of high-yielding wealth-management products that can circumvent government interest-rate controls and be used to finance high-interest loans to desperate customers.

    While the products are popular, disclosure is often poor. Bank employees insist the principal is guaranteed, but contracts for wealth-management products are usually vague, simply noting that there could be risk. Most offer little detail about where the money will be invested.

    Much of the money, analysts say, is lent to property developers and local government financing vehicles, areas that have government officials worried because of an explosion in property development and soaring housing prices.

    Who is responsible for the loans is not always clear, and that is where everyone starts getting nervous.

    "If a wealth-management product defaults, who is on the hook? It's all very murky," said Mr Michael Pettis, a finance professor at Peking University.