Economist magazine on China's banks
2013-05-31 08:26阅读：
China's shadow banks: The credit kulaks
The Economist magazine, 1 June 2013
http://www.economist.com/news/finance-and-economics/21578668-growth-wealth-management-products-reflects-deeper-financial-distortions
AS THE grandson of a “rich farmer”, a stigmatised class in
communist China, Joe Zhang grew up on the wrong side of the
ideological tracks. At school he envied the town-kids who could
look forward to a cushy job minding grain-stores or writing
propaganda. But after winning a spot at university, he eventually
escaped into central banking in Beijing and, later, investment
banking in Hong Kong. By pleading, petitioning and playing a lot of
ping pong (a sport he hates) he was even admitted into the
Communist Party in 1985.
Then, in 2011, his social climb suffered an abrupt reversal. He
took on a role that remains stigmatised and discriminated against
in today’s China: he became a shadow banker. His new book, “Inside
China’s Shadow Banking: the Nex
t Subprime Crisis?”, recounts his trials as the head of a
microlender in Guangdong. Elsewhere in the world, microcredit is a
respectable, even canonised, endeavour. In China, Mr Zhang
complains in his book, it is “only slightly more respectable than
perhaps massage parlours or nightclubs.”
He describes the variety of institutions and instruments that
operate and innovate in the shadow of China’s mammoth banks, where
they are hard for the authorities to see. They include the informal
lenders, kerbside capitalists and back-alley bankers for which
China is famous. But the most important institutions are China’s 67
trust companies, lightly regulated finance firms that make loans
and other investments but cannot collect deposits. And the most
significant instruments are the uncountable wealth-management
products (WMPs), which raise money from better-off investors, in
large increments (at least 50,000 yuan, about $8,160) and for short
periods (typically less than six months, sometimes much
less).
Like banks, shadow banks are middlemen, issuing liabilities and
holding assets. Another point of resemblance is that their assets
are often less liquid, longer-term and riskier than their
liabilities purport to be. Yet unlike banks they lack an official
safety net, such as a lender of last resort, should these
mismatches ever be exposed.
That makes shadow banking a bit scary. The International Monetary
Fund frets that “a fast-growing share of credit is flowing through
the less-well-supervised parts of the financial system.” Mr Zhang’s
book is marketed to people who suspect that systemic dangers lurk
in these shadows. But the tale it goes on to tell is more
interesting. Shadow banking, he argues, is “more a symptom than the
disease itself.”
The disease itself is financial repression. China imposes a ceiling
on the interest rate that banks can pay to depositors. This keeps
banks’ cost of funding low, making them eager to lend. To curb
their enthusiasm, the regulators must impose offsetting limits on
their lending, as Dong He and Honglin Wang of the Hong Kong
Institute of Monetary Research have pointed out. These limits range
from conservative loan-to-deposit ratios to heavy reserve
requirements and blacklists of overexposed borrowers, such as
property developers or local governments.
Where there is regulation, there is evasion, notes Mr Zhang. Much
of China’s shadow-banking system serves merely to help banks evade
deposit ceilings and lending guardrails. It would be less pervasive
if China’s lending limits were less strict. But then those limits
would not need to be so tight if banks’ funding costs were not
repressed.
Neglected by the banks, small firms are willing to pay the 20-24%
interest rates charged by China’s 6,080 microlenders. But
micro-loans amounted to only 592 billion yuan ($97 billion) at the
end of last year, equivalent to less than 1% of bank credit (see
table). A far bigger source of finance for illiquid firms is other
more liquid ones. Non-financial companies are barred from lending
directly to each other, but they can make “entrusted” loans via a
bank or trust company. This lending is sizeable, but also
relatively safe, according to Standard & Poor’s. Most of the
loans are made by big firms to their sister companies.
WMP! There it is
As well as midwifing loans from one firm to another, trust
companies also raise pools of money from investors by issuing their
own WMPs. These products amounted to 1.9 trillion yuan at the end
of 2012. Most mature within 1-3 years, according to Jason Bedford
of KPMG, an auditing firm. The money is often invested in loans to
credit-starved enterprises. Some products are, however, more
imaginative, speculating on tea, spirits, or even graveyards. In at
least one case, a product was not just imaginative but entirely
imaginary: raising money for a non-existent project dreamed up by a
rogue trust-company manager.
These products are, then, risky. But potential losses are cushioned
by collateral and unmagnified by leverage, Mr Bedford points out.
In principle these losses are also borne by investors. The buyers
of two faltering products issued by CITIC Trust, China’s largest
trust company, have been told not to expect a bail-out. In
practice, however, many trusts are less stiff-spined. They are
tempted to rescue investors to maintain their good name.
Often, these trust products are sold through banks, which
distribute them, without guaranteeing them. The public, however,
“pretends not to understand the distinction”, Mr Zhang says. By
feigning ignorance, aggrieved investors hope to browbeat the
government into holding the banks liable, he argues. In Hong Kong
banks had to ease the pain of losses on Lehman minibonds sold
through their branches. It is notable that one of the banks
involved, Bank of China, has been unusually reluctant to sell WMPs
in the mainland, points out Mike Werner of Sanford C. Bernstein, a
research firm.
Trust products sold by banks tend to be confused with a less risky
kind of WMP: bank products packaged by trusts. In the first case,
Mr Bedford explains, the bank provides a service to the trust
companies, offering its staff and branches as a distribution
channel. In the second case, the roles are reversed: trust
companies and, increasingly, securities companies, provide a
service to the bank, helping it to package assets in its
WMPs.
Unlike trust products sold by banks, bank products packaged by
trusts are fairly conservative. They are mostly “deposits in
disguise”, as Standard & Poor’s put it, offering yields one or
two percentage points higher than the deposit-rate ceiling. As well
as helping banks to breach this ceiling, these products allow banks
to window-dress their balance-sheets, points out Mr Werner. The
WMPs are typically timed to mature just before the end of each
quarter. As the money is returned to the WMP-buyers, it is paid
into their deposits at the bank, just in time to bring the bank’s
loan-deposit ratio below the regulatory limit of 75%.
If enough of the riskier WMPs fail, it might prompt investors to
stop buying fresh products. Since WMPs usually mature long before
the underlying assets do, that could inflict a nasty credit crunch
on otherwise solvent ventures. But the impact on the banking system
would be less obvious. If investors lose confidence in WMPs, they
are likely to switch to deposits instead. The result would be a run
to the banks, not a run on them. The only worry is that investors
may not run to the same banks that issued most of the WMPs. China’s
smaller joint-stock banks, which have led WMPs issuance, could
therefore face a funding squeeze.
One answer would be to introduce formal deposit insurance. That
would force banks to pay for the implicit backing they enjoy from
the state. It would instil confidence in the smaller banks, as well
as the ones that are obviously too big to fail. It would also draw
a clearer distinction between safety (insured deposits) and risk
(uninsured investments).
Critics of China’s shadow banking like to compare WMPs to the
collateralised debt obligations at the heart of the global
financial crisis. But according to Ting Lu of Merrill Lynch, the
banks’ WMPs bear a closer resemblance to American money-market
funds, investing mostly in safe, liquid, short-term paper. Those
funds, which first arrived in America in 1971, competed
successfully with bank deposits, forcing legislators to phase out
America’s caps on deposit interest rates in the 1980s. Perhaps the
banks’ WMPs will prove a similar spur to reform in China.
Mr Zhang is impatient for that day. He graduated from the central
bank’s academy back in 1986 with a thesis entitled “The Path to
Interest-Rate Liberalisation”. Then, he thought the removal of
interest-rate controls was only five years away. Over a quarter of
a century later, students are still writing the same thesis, he
says. “Those five years have never ended.”
