China banking: Beijing’s loan crackdown may have unintended consequences. Concerned about unregulated lending, the China Banking Regulatory Commission has ordered banks to bring loans made to trust companies back onto their books. More transparency is good for the system. But tighter controls may mean there is less room for new loans.
Lightly-regulated trust companies package up bank loans and sell them to investors in the form of structured products. Use of this loophole, which allows banks to keep loans off their balance sheets, has exploded as China’s banks struggle to stay within tighter official lending targets.
During the first half of the year, off-balance sheet loans totalled 1.3 trillion yuan ($191.4 billion) — close to a third of official lending — according to Fitch Ratings. Overall, Fitch estimates that 6.7 per cent of China’s loan base, or 2.3 trillion yuan, is not recorded on bank balance sheets.
These loans won’t necessarily all go bad. A lot of them are to property developers and infrastructure projects, which have a hard time getting credit through normal channels. Defaults have been extremely rare so far.
Nevertheless, closing the loophole could constrain banks’ ability to make new loans. The regulator has ordered them to lend no more than 7.5 trillion yuan this year, down from 9.5 trillion yuan in 2009.
They have already extended 4 billion yuan in the first half. If all off-balance sheet loans were moved back onto the books today, just 1.2 trillion yuan would be available for new lending in the second half.
To deal with this concern, the regulator has given banks a grace period of 18 months. Structured products sold by trust companies typically mature in a year or less, so many loans may have been repaid before the deadline. However, banks will still have to absorb loans with a maturity of more than 18 months.
With the loophole closed, banks will also have to stick more closely to official lending targets in future. One option is for Beijing to raise its loan targets. Compared to the risks of undisclosed and unregulated off- balance-sheet lending, that seems a price worth paying.