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Caixin
Sep 12, 2019 08:58 PM
FINANCE

Growth in China Banking Assets Slows as Crackdown Bites

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Over the past two and a half years, the growth rate of banking assets has dropped from above 15% to below 8%. Photo: VCG
Over the past two and a half years, the growth rate of banking assets has dropped from above 15% to below 8%. Photo: VCG

China’s efforts to reduce risks in the nation’s financial system have shown some success with the rate of growth of assets held by the country’s banks dropping by almost half over the past three years, the banking regulator said Wednesday.

Banks’ total assets stood at 281.6 trillion yuan ($40.57 trillion) at the end of June, 8.2% higher than the same period last year, Xiao Yuanqi, chief risk officer of the China Banking and Insurance Regulatory Commission (CBIRC), said at a briefing. That’s down from a 15.7% increase in the same period in 2016 and an 11.5% increase in 2017, although there has been some acceleration since 2018 when the growth rate was 7%, data compiled by the commission show.

The slowdown over the past three years has been mainly due to a slump in shadow banking activities after a deleveraging campaign by financial regulators, Xiao said, highlighting a decline in the channeling business, off-balance sheet lending by banks. Channeling refers to investments by banks, companies and high-net-worth individuals in high-yield products via “channels” — usually nonbank vehicles such as trusts — to achieve higher returns.

The regulatory campaign has resulted in a 14.5 trillion yuan drop in assets classified by the CBIRC as high-risk since the beginning of 2017 and an 85% decline in outstanding wealth management products on the in-ter-bank market, Xiao said. Outstanding assets involved in trust companies’ channeling business shrank by 13.15% year-on-year, the data show.

Regulatory storm

This has shifted so-called idle funds circulating in the financial system in search of speculative activities into more productive uses, making more money available for banks to lend to the real economy and help bring down financing costs for companies, Xiao said.

China’s regulators unleashed a regulatory storm in March 2017 to reduce systemic risk in the financial system and bring down leverage amid government concerns that lax oversight had built up unacceptable dangers. A key focus of the campaign was a crackdown on asset management products and wealth management products (WMP), financial products sold by banks to customers. The proceeds were often invested in trust products that funnel capital to risky borrowers locked out of the formal banking system, such as local government financing vehicles and real estate developers. This business left banks bearing the risks even though the liabilities did not appear on their balance sheets. Nonbank financial institutions were also selling wealth management products to customers that invested in similar risky assets.

In an effort to defuse the risks and prevent arbitrage by institutions playing one regulator off against the other, policymakers issued a new, unified regulatory framework in November 2017 covering the entire asset management industry which was worth around $15 trillion at the time.

At Wednesday’s briefing, Xiao said the outstanding value of WMPs invested in asset management products had shrunk by 10 percentage points since the new asset management rules were released.

Xiao denied that the slowdown in asset growth would expose risks among smaller banks. He said that resolving the problem of high-risk assets such as interbank financing among smaller banks has helped defuse their overall risks.

More transparency

“Interbank financing was the most prominent and risky business of small and midsize banks,” he said. “We have helped them deal with these risks and have squeezed them out.” After nearly two years of cleaning up, some of the high-risk assets have been disposed of, and some have been transferred back onto banks’ balance sheets, which has made them more transparent and easier to monitor, Xiao said.

In the past few months, regulators have stepped in to help several small and midsize banks. Since late May, the authorities have taken over Baoshang Bank Co. Ltd., introduced strategic investors to Bank of Jinzhou Co. Ltd. and arranged cash infusions for Hengfeng Bank Co. Ltd. from two parties, including a unit of China’s sovereign wealth fund.

The banking regulator has put together a list of “at-risk” financial institutions and asked local regulatory bodies and local governments to make detailed, step-by-step plans to defuse their risks, Xiao said.

Contact reporter Timmy Shen (hongmingshen@caixin.com, Twitter:)

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