* New rules signal fresh push for deleveraging
* Chinese cabinet says shadow banking is positive
* But new rules needed to plug regulatory loopholes
* Trust companies shouldn't engage in "credit-like" business
By Heng Xie and Gabriel Wildau
BEIJING/SHANGHAI, Jan 6 China's cabinet has
published guidelines strengthening regulation of risky
off-balance-sheet lending in a new effort to address growing
financial risks from an explosion in debt.
The State Council's guidelines call for tighter regulation
of banks' off-balance-sheet lending and say that trust companies
- the biggest non-bank players in what's called "shadow banking"
- should return to their original pupose as asset managers and
not engage in "credit-type" business.
A copy of the council's Document 107, dated Dec. 11, was
obtained by Reuters. There's been no official confirmation of
the document, which was addressed to government agencies at the
central and local level.
An index of the biggest mainland stocks closed at
its lowest level in five months on Monday, as concerns about the
new regulations weighed down the market.
China's policymakers are concerned that the country's
economy has become overly reliant on borrowing to fuel growth
and that debt-fueled investment has created massive overcapacity
in many industries.
If strictly implemented, the deleveraging push could put
China's economy on a more sustainable long-term path by reducing
the risk of a bad-debt crisis. But short-term growth would
likely fall as a reduction in credit growth spurs a fall in
"One can predict that growth of total social financing will
slow and fixed-asset investment will also slow," said Liu Yuhui,
director of the financial focal point laboratory at the Chinese
Academy of Social Sciences, a government think tank, referring
to the central bank's measure of total credit from all sources.
"If this isn't accompanied by various forms of debt
restructuring, some sectors may see their funding chains broken
and there could be defaults," he said.
An official audit released last week showed that China's
local government debt reached 17.9 trillion yuan at end-June
2013, or up from 10.7 trillion at end-2010.
Local governments are among the largest recipients of shadow
China's ratio of total debt-to-GDP, including government,
corporate and household debt, was set to reach 218 percent of
GDP by the end of 2013, up 87 percentage points since 2008,
rating agency Fitch estimates.
Though this level remains lower than many developed
countries including the U.S. and Japan, economists warn that
such rapid debt run-ups have been associated with financial
crises in other nations. That's because most economies aren't
able to efficiently deploy such a large amount of investment
within a short period.
The State Council's guidelines also come amid two major cash
crunches in the past six months. The interest rates that banks
charge each other for short-term loans spiked to record highs in
June and again last month, as banks scrambled to raise cash to
pay maturing debts.
Many bankers attributed the interest-rate spikes in part to
the growth of shadow banking.
ALTERNATIVES FOR CUSTOMERS
Banks raise funds for shadow bank loans largely by selling
so-called wealth management products (WMPs), which they market
to savers as a higher-yielding alternative to traditional bank
Regulators are concerned that banks are using short-term
interbank borrowing to fund payouts on maturing WMPs, even when
the underlying assets - including loans, bonds, and bank
acceptance bills - haven't yet matured.
"In the last year, banks have been hit hard by liquidity
problems. Quite a few banks wish the central bank would relax
liquidity, but based on Document 107, it appears the relevant
authorities don't agree," said Liu.
While the guidelines signal high-level concern about the
risk from shadow banking, they contain no specific rules.
In China's policymaking process, the State Council typically
issues broad guidelines, which regulatory agencies then follow
up with specific rules.
Indeed, rumours have circulated for several months that the
banking regulator is preparing new rules to crack down on the
use of complex interbank transactions designed to disguise risky
corporate loans as loans to other banks.
AMEND, DON'T END
The State Council document says shadow banking is a
"beneficial" and "inevitable" consequence of financial
development and provides an official definition of the term.
But the guidelines also call for closer monitoring and
tighter regulation of banks' off-balance-sheet lending, which is
often conducted through intermediaries such as trust companies
and securities brokerages.
Shadow banking has grown rapidly in China since 2010, when
banks began running up against limits on expanding loans through
With credit demand still strong but banks increasingly
constrained by regulations such as capital adequacy and
loan-to-deposit ratios, institutions devised complex structures
designed to keep lending to customers.
Like bank WMPs, trust companies raise funds by selling
high-yielding investment products, using the proceeds to make
loans or buy other assets.
Chinese savers have flocked to these products as an
alternative to low-yielding bank deposits, a weak stock market
and a frothy property market. Trusts surpassed insurance
companies this year to become the non-bank financial
institutions with the most assets under management.
If fully implemented, cutting off trusts' credit business
could restrict lending to weak borrowers such as local
governments and property developers, who are largely shut out
from traditional bank loans but can still obtain high-interest
A Reuters investigation last year found that local
governments, property developers and industries suffering from
surplus capacity accounted for about 70 percent of trust loans
given in 2012.
CAN LOOPHOLES BE CLOSED?
Trust loans outstanding reached 4.62 trillion yuan at the
end of September, according to the China Trustee Association.
Such loans accounted for 11 percent of net new corporate
fundraising in the first 11 months of last year, central bank
The latest guidelines follow a set of regulations issued in
March, which limited the amount of shadow bank loans that banks
could package into WMPs.
With the new policies, authorities seek to address the
problem of banks exploiting loopholes by clarifying the
responsibilities of various regulators, including the People's
Bank of China, the China Banking Regulatory Commission and the
China Securities Regulatory Commission.
The State Council also said that investors must bear the
risk of losses associated with WMPs and that banks are forbidden
from providing guarantees on the underlying credits.
Analysts are concerned WMP investors widely perceive the
products as carrying an implicit guarantee from state-owned
banks, even when the fine print says otherwise. That leaves
banks exposed to the risk from many loans not on their balance
sheets, as they could face heavy pressure to compensate
investors to protect their reputations.
The fresh guidelines also call on the PBOC to develop new
statistics to measure shadow banking and to make regular reports
to the State Council.