China’s largest conglomerate by revenue has invested more than $50bn in shadow banking products over the past three years, highlighting the proliferation of riskier financing channels in the world’s second-largest economy.
According to disclosures by Citic Group, an industrial and financial services conglomerate, its “maximum loss exposure” to wealth management products and other higher yielding investments reached Rmb322bn ($52bn) at the end of 2013, 36 times higher than its 2011 exposure of Rmb9bn.
Citic is selling almost all of its assets to Citic Pacific, its Hong Kong-listed arm, in a $36bn transaction that has been hailed as a landmark in China’s efforts to reform its state-owned companies.
Many of China’s largest Hong Kong and Shanghai-listed state companies are controlled by mainland parent companies with their own vast array of assets, which can give rise to complicated and sometimes opaque related-party transactions. State sector reform advocates hope that Citic Group’s asset injection into Citic Pacific will create a more transparent entity and serve as a model for other groups to follow.
In a 740-page document released last week to Citic Pacific shareholders, Citic Group opened a rare window on to workings of its financial, energy and infrastructure arms. These included details about the enthusiasm with which its companies had leapt into the shadow banking sector.
Wealth management products (WMPs) and other non-standard credit instruments, which offer higher yields than traditional corporate bank deposits, are issued by property developers, coal miners or other third parties. Though often sold through state banks, which collect fees for acting as intermediaries, there is no guarantee that investors will get their money back if the third-party issuer has financial difficulties.
Citic Group is also an active conduit for the sale of WMPs and other non-standard credit instruments, mainly through Citic Bank. As of the end of last year, Citic Group companies had sold WMPs worth Rmb976bn on behalf of third-party issuers. The corresponding figure for China’s largest bank, Industrial and Commercial Bank of China, was Rmb1.1tn.
Citic Group did not respond to a request for comment. But a person close to the Citic Pacific transaction said: “These are normal operating and investment activities. The majority of them will have been taken on by Citic Bank.”
Citic Group’s investment in WMPs was equivalent to about 8 per cent of its total assets. WMPs and other non-standard credit instruments account for as much as one-third of assets at some of China’s smaller banks.
The Financial Stability Board, the Basel-based body that monitors the global financial system, estimates that China’s shadow banking sector is worth more than Rmb13tn, or about 10 per cent of the country’s banking system.