China banks "significantly exposed" to shadow financing - Fitch

[Anees]

China banks "significantly exposed" to shadow financing - Fitch

By Kevin Yao
BEIJING | Wed Apr 10, 2013 11:15am BST
(Reuters) - Chinese banks face growing risks as they are heavily exposed to the "shadow banking" being used by debt-laden local governments to raise funds, global ratings agency Fitch said on Wednesday.

Fitch's warning over the health of China's banking sector came a day after its cut of China's long-term local currency debt rating by a notch to A-plus.

"The banking sector is "significantly exposed" to the shadow banking because there all sorts of ties between the banks and shadow credit channels," Charlene Chu, head of China financial institutions at the ratings agency, told a teleconference.

Chu said a lot of "shadow credit" was going to many sectors, which included local governments.

Total shadow financing in China could amount to around 60 percent of gross domestic product (GDP) and some 80 percent of new funds could be linked to commercial banks, Chu estimated.

The sprawling shadow financing, which includes trust loans, bank acceptance bills and underground lending, has driven the torrid rise in overall credit, which is approaching 200 percent of GDP, Fitch said.

Many local governments, facing difficulties in getting fresh bank credit, are turning to the so-called shadow financing channels to fund investment projects, Chu said.

"We could see an asset quality problem in the financial sector in fairly sizable magnitude within the next few years," Chu said without elaborating.

Ratings agency S&P estimates that outstanding Chinese shadow banking credit totalled $3.7 trillion (2.41 trillion pounds) by the end of 2012, equal to 34 percent of on-balance-sheet loans and 44 percent of GDP.

China's banking regulator said the bad bank loan ratio was 0.95 percent at the end of 2012, down 0.05 percentage points from a year earlier. But that figure only covers on-balance-sheet loans, leaving a huge amount unmonitored.

"All Chinese banking is an arm of the government but that doesn't stop loans going sour, it only stops them showing up as sour," said Gary Greenberg, Hermes Fund Managers Head of Emerging Market Equity.

"There is a maturity mismatch in the financial system: long term infrastructure lending versus short term bank funding."

Chinese banks have rushed to sell short-term wealth management products to support their credit growth.

LOCAL DEBT

Chinese regulators have shown greater concerns over risks from off balance-sheet banking activity, but they face a dilemma as banks embrace financial innovations under Beijing's strategy to gradually liberalise financial markets and interest rates.

The proportion of bank loans in the total social financing - a broader measure of liquidity in the economy that covers bank loans as well as alternative financing - has fallen to a record low of 52 percent in 2012 from over 90 percent a decade ago.

Fitch estimated that local government debt may have climbed to 12.85 trillion yuan ($2.1 trillion) at the end of 2012, or about 25 percent of GDP, up from 23.4 percent at end-2011.

Official data showed that local governments had amassed debt of 10.7 trillion yuan by the end of 2010. The government has yet to update the figures.

Beijing is trying rein in the debt build-up - a hangover from Beijing's 4 trillion yuan stimulus package launched at the height of the global crisis in 2008 to underpin the economy.

Few analysts expect widespread debt defaults by local governments given China's healthy economic growth, and Beijing has deep enough pockets to step in if needed, analysts say.

"China's broad debt problem ultimately is going to need sovereign resources to fix in some way," said Andrew Colquhoun, Fitch's Head of Asia-Pacific Sovereigns.


Fitch said it will keep China's local and foreign currency credit ratings on a stable outlook in the foreseeable future.

(Additional reporting by Umesh Desai in Hong Kong; Editing by Simon Cameron-Moore)






China banks significantly exposed to shadow financing - Fitch | Reuters

 

[illusion8]

The unprecedented level of credit expansion in China has gotten to the point where it dwarfs anything we’ve seen before with overall credit now at about $23 trillion, making a severe banking crisis a very real possibility.

With a shadow banking system that is becoming increasingly prominent, the rise of bundling of assets and securitization, and an acceleration of policy tightening, over-indebted local governments and institutions will feel the pain of a rising cost of capital, prompting Fitch Ratings to raise red flags about the future growth prospects of the Chinese economy. At Nomura, where they noted that liquidity tightening is dangerous in a highly leveraged economy, they increased their probability that a risk scenario could push GDP growth below 7% this year, threatening social stability.

China has been ominously out of the scene over the past several months, as the business and investing community has focused on the Federal Reserve and the European Union. Yet the world’s second largest economy could be on the verge of a dramatic financial sector meltdown that could jolt the globe.

With a “credit-driven growth model [that] is clearly falling apart” and facing the specter of “Japanese-style deflation,” the risks have definitely increased, explained Fitch’s Charlene Chu, cited by The Telegraph’s Ambrose Evans-Pritchard.

The Chinese financial sector is definitely sending out some dangerous signals. Overall credit has grown from $9 trillion to $23 trillion in the five years since Lehman, while the ratio of credit to GDP has surged 75 percentage points to about 200% in that time; this compares with an expansion of 40 percentage points in the five years to the implosion of the U.S. banking system in 2008, and about the same in the build up to Japan’s Nikkei bubble in 1990, Evans-Pritchard showed.

A major problem is that much of this incredible surge in credit has been channeled through the shadow banking sector, which is very closely connected to the banks. Total non-loan credit hit $5.6 trillion in 2012, with nearly $2 trillion of that credit extended by opaque non-bank financial institutions, Fitch’s research shows. Furthermore, more than $2 trillion were connected to informal securitization of bank assets in so-called wealth management products (WMP).

The share of new credit coming from “shadow channels” is rising, which suggests not only that more credit is going to weaker borrowers that can’t afford bank lending, but also that institutions with shoddy risk assessment and limited loss-absorption capacity are becoming increasingly relevant players; add the fact that three-fourths of shadow banking transactions are connected to banks and you have a recipe for disaster.

Credit is now twice as large as GDP and growing twice as fast, Fitch noted, while the efficiency of said credit has collapsed: according to Evans-Pritchard, marginal GDP growth tied to each additional yuan lent has fallen from 0.85 to 0.15 over the past four years.

At the same time, policy tightening has accelerated in May, leading to more difficult liquidity conditions, according to Nomura, which noted official total social financing has tumbled over the past two months. At the same time, short-term financing rates like the 7-day repo and the three-month Shanghai interbank rate have shot up in June. “We believe the series of policy tightening measures applied to the shadow banking sector in the past three months has reached a critical mass, such that deleveraging in the banking sector is happening,” they noted.

Premier Li Keqiang recently noted his satisfaction with the current rate of economic growth, while policymakers have been cracking down on what they see as financial excesses. This suggests the Chinese state won’t engage in policy easing any time soon, while the People’s Bank of China ’s (PBoC) inaction in the face of rising bank borrowing costs indicates little will to intervene markets. With a weak global economy and emerging markets suffering the Fed’s possible taper, there’s a 30% chance GDP growth in China may fall below 7% in the third or fourth quarter, Nomura’s team notes.

The situation could be dramatically more dangerous if current risks materialize into a full blown financial crisis. Much like in the U.S., “stress will begin in the periphery and migrate to the core,” Fitch’s team said. Cracks have already emerged, as non-bank financial institutions have been under pressure as loan and trust defaults have increased.

In the U.S., major banks like JPMorgan Chase JPM +0.35%, Goldman Sachs, Bank of America BAC +0.68%, and Citigroup C +1.38% were bailed out as the government forced all of them to take capital. In China, the government has the firepower to save its banking system, Fitch says. Banks have been forced to park more than $3 trillion in reserves in the PBoC, and the government is ready to unleash its firepower in the face of a crisis. But, “these factors mean a financial crisis isn’t inevitable, but they also enable an unhealthy situation to go on longer than it should, possibly resulting in an even larger problem down the road,” they added. At the same time, mid-tier banks that have engaged in substantial off-balance sheet activity and issuance of WMPs, have limited loss absorption capacity, and thin liquidity could definitely be on the hook, hurting their larger counterparts and the broader economy.

China is the world’s second largest economy and one of the major holders of U.S. debt. It is also a regional power and one of the most important producer and consumer of goods and services. While it is unlikely that China will crash in the immediate-term, the factors that could result in a banking crisis are being set in motion.

China: Massive Credit Bubble Fueled By Shadow Banking And Securitization Could Collapse Banks - Forbes

 

[Truth Finder]

China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.

The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.
"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.
"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph.
While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. "It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property," she said.
Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion (£0.9 trillion) segment of the shadow banking system.
Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up. "Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said.
Fitch warned that wealth products worth $2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.
This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.
Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a "massive savings account that can be drawn down" in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom.
Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire US commercial banking system in five years," she said.
The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. "This is beyond anything we have ever seen before in a large economy. We don't know how this will play out. The next six months will be crucial," she said.
The agency downgraded China's long-term currency rating to AA- debt in April but still thinks the government can handle any banking crisis, however bad. "The Chinese state has a lot of firepower. It is very able and very willing to support the banking sector. The real question is what this means for growth, and therefore for social and political risk," said Mrs Chu.
"There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s. With credit at 200pc of GDP, the numerator is growing twice as fast as the denominator. You can't grow out of that."
The authorities have been trying to manage a soft-landing, deploying loan curbs and a high reserve ratio requirement (RRR) for banks to halt property speculation. The home price to income ratio has reached 16 to 18 in many cities, shutting workers out of the market. Shadow banking has plugged the gap for much of the last two years.
However, a new problem has emerged as the economic efficiency of credit collapses. The extra GDP growth generated by each extra yuan of loans has dropped from 0.85 to 0.15 over the last four years, a sign of exhaustion.
Wei Yao from Societe Generale says the debt service ratio of Chinese companies has reached 30pc of GDP – the typical threshold for financial crises -- and many will not be able to pay interest or repay principal. She warned that the country could be on the verge of a "Minsky Moment", when the debt pyramid collapses under its own weight. "The debt snowball is getting bigger and bigger, without contributing to real activity," she said.
The latest twist is sudden stress in the overnight lending markets. "We believe the series of policy tightening measures in the past three months have reached critical mass, such that deleveraging in the banking sector is happening. Liquidity tightening can be very damaging to a highly leveraged economy," said Zhiwei Zhang from Nomura.
"There is room to cut interest rates and the reserve ratio in the second half," wrote a front-page editorial today in China Securities Journal on Friday. The article is the first sign that the authorities are preparing to change tack, shifting to a looser stance after a drizzle of bad data over recent weeks.
The journal said total credit in China's financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. "Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output," it said.
It also flagged worries over an exodus of hot money once the US Federal Reserve starts tightening. "China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens," it wrote.
The journal said foreign withdrawals from Chinese equity funds were the highest since early 2008 in the week up to June 5, and withdrawals from Hong Kong funds were the most in a decade.

http://http://www.telegraph.co.uk/finance/china-business/10123507/Fitch-says-China-credit-bubble-unprecedented-in-modern-world-history.html

 

[HongWu]

China shadow banking is bigger than the whole Indian GDP.... wow!