Shadow banking sector playing cat and mouse with Chinese regulators
February 4, 2014 Leave a comment
Shadow banking sector playing cat and mouse with Chinese regulators
Staff Reporter
2014-02-03
Beijing’s latest move to reign in the shadow banking sector is expected to have a considerable impact on financial trusts, but the problem will likely remain because of a loophole in the regulations, the Chinese-language CBN Weekly reports.
The State Council issued guidelines for enhancing regulation in the shadow banking sector in its No. 107 document in December last year, which banned financial institutes’ involvement in businesses linked to loans disguised as financial products.
The document reflected the Chinese government’s realization that housing prices have risen to a dangerous level, and that the shadow banking sector can no longer be allowed to expand without regulation.
A large portion of investment products and trusts, the size of which has grown rapidly and is worth 10 trillion yuan (US$1.6 trillion), are actually part of the credit offered by the shadow banking business, according to the report.
Property companies are behind the thriving business of shadow banking as they borrow at interest rates of as high as 20% to fund their development projects. These companies are forced to set higher prices for the houses they built because of the high borrowing rates, thus creating a bubble in the property market, the report said.
With profit margins deteriorating, these companies have begun packaging their development projects as trusts in order to obtain more funding, but the practice increases risks because of expanding leverage. The situation has led to the Chinese property companies accumulating massive debts, with the debt-to-asset ratio of all listed firms in the sector reaching an almost decade high of over 70% in mid-2013, the report said.
Although the government has issued the guidelines, current shadow banking operations are seizing the opportunity to earn profits before more detailed regulations are introduced. Moreover, businesses in the financial sector have been playing a cat and mouse game with regulators as they continue to find ways to circumvent new regulations, CBN Weekly said.
As fund companies were not included in the No. 107 document, the report predicted that the shadow banking sector will see rapid growth in the segment this year.
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