Dangerous things can lurk in the shadows of a financial system. We know this because when the US banking system almost burnt down in 2008, the stuff in the shadows was the fire’s accelerant. The highly-leveraged, off-balance sheet vehicles loaded with securitised debt meant made the banking crisis were far worse than it would have otherwise been.
Knowing the problems that lurked in the US, the idea of shadow banking in China freaks people out. The sector seems to have grown fast, in an economy already known for its tendency for asset bubbles and bad lending. We have spent time poking around in the shadows. We believe that much of the fear is misplaced.
China’s so-called shadow banking has little to do with what happened in the US. At its broadest, shadow banking is credit extended by non-bank financial institutions. That goes on in China – via, most importantly, wealth management products. These are sold by trust companies and banks as a form of asset management. The trusts manage some Rmb10tn (US$1.6tn) for rich individuals and firms, and the banks’ WMP officially are of a similar scale (though some Rmb3tn of trust AUM is bank WMP money).
The sector has its roots in reaction to regulation. Banks, facing stricter capital requirements as Basel III has been introduced, have looked to develop off-balance sheet business. And households are keen to move funds stuck in traditional deposit accounts to WMPs since the yield pick-up is significant. For the banks, the majority of WMP funds are managed off-balance sheet.
There are clearly some problems here. Holding WMP funds off the balance sheet allows the banks to avoid some important regulatory ratios – capital is not held against investments, for instance. If a WMP product goes bad, in theory the investor bares the loss but in practice the bank usually makes the client whole.
But many of the risks that grip the popular imagination are ill-founded. Moreover, there are important differences between the WMPs the bank sell and the wealth products sold by the trust companies.
First of all, when we looked through a typical bank’s WMP portfolio, we found that most of the funds are used to buy short-term, liquid interbank deposits. As a result, the average WMP yield tracks interbank yields. So, the idea that all these funds are being poured into residential developments in China’s ‘ghost cities’ is wrong. Only 20-30 per cent of bank WMP funds are being lent out.
In contrast, trust company funds are almost entirely being lent out, and our research suggests that most of those funds are going to real estate and local government infrastructure companies. There are much more credit risks here.
Second, when the banks lent out WMP funds, the borrowers usually go through the exact same credit approval process as they would as if they were borrowing on balance sheet funds. The quality of trust companies’ credit process varies hugely. Moreover, while banks have large balance sheets to back any losses, trusts have thin layers of capital, and so are far more vulnerable to defaults.
Third, none of these loans are spliced, diced and sold off to other investors. Rather, these assets sit cleanly on the trusts’ balance sheet or in the banks’ WMP asset pool. Securitisation spread risk through the system in the US once a small number of securitised mortgage packages went bad. In contrast, in China, if a loan to a Shanxi mining company goes bad, the risk is contained – there is no infection through the system.
Fourth, there is little leverage. Trusts and WMPs generally raise funds from well-off folk and invest them. If there is a loss, either the investor (or the asset manager) takes the loss. If there are losses, there should be no deleveraging of portfolios triggered.
For these reasons, we think the best way of thinking about the risks of ‘shadow banking’ in China is that it will probably add to non-performing loans (NPL), but that it is unlikely to turn an NPL problem into a full-blown financial crisis, as critics allege.
Ultimately, though, the only thing which will slow the growth of this industry is rate liberalisation. At present, deposit rates are controlled. Once the People’s Bank of China allows rates to rise, banks can then compete for funds the usual way, rather than relying upon WMPs.
For the moment, then, WMPs are here to stay. While there may be risks involved, there is one big upside. This is rate liberalisation China-style. Households are getting paid a higher return on their savings. At the same time, the banks are learning to cope with paying more for their funds. This is happening gradually, not with the big bangs which have caused crises elsewhere. WMPs may actually reduce the risk of a banking sector crisis in China.
This article was co-authored by Dorris Chen, Head of China Financials Research and Stephen Green, Head of Research, Greater China.
然而，从根本上说，唯有利率自由化会减慢影子银行业的发展。就目前而言，存款利率受到管制。一旦中国人民银行(People’s Bank of China)允许存款利率上浮，银行就可以通过常规的方式（而不是依赖理财产品）来争抢资金了。
本文由渣打银行(Standard Chartered)证券研究部中国金融行业研究主管陈睆明(Dorris Chen)和大中华区研究主管王志浩(Stephen Green)共同撰写