Loan Practices of China’s Banks Raising Concern
... By the end of last year, China’s shadow banking activity was valued at $6 trillion, twice the level in 2010, and now equal to 69 percent of China’s gross domestic product, according to a report released in May by JPMorgan Chase. Now, even state-run banks are doing shadow lending, extending financing to companies in high-risk sectors.
Who is responsible for the loans is not always clear, and that’s where everyone starts getting nervous.
“If a wealth management product defaults, who is on the hook?” asked Michael Pettis, a finance professor at Peking University in Beijing and senior associate at the Carnegie Endowment for International Peace. “It’s all very murky. In these things, the banks are technically acting as intermediaries.”
Financial experts worry about the lack of transparency in the market when China’s economy is weakening. They also fret about whether some borrowers have the cash flow to repay their loans.
Fitch Ratings, the credit ratings agency, began warning two years ago that “wealth management activity carries unique liquidity and credit risks.” But the lending continued and increased.
In a newspaper opinion piece last year, Xiao Gang, then head of the Bank of China, a leading commercial bank, and now the nation’s top securities regulator, referred to shadow banking as “fundamentally a Ponzi scheme.”
The government has so far tolerated shadow banking because getting rid of it is all but impossible, analysts say. Wealthy customers are accustomed to getting better returns, and a large segment of the economy is desperate for capital and cannot easily gain access to regular bank loans, largely because of government restrictions. But they are willing to pay the shadow banks 9, 10, even 15 percent interest...
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