Credit Risk Still Rising in China

Down payment loans for homes are only one slice of a metastasizing crack-up credit boom in China.

Fitch: Boom in WMPs a Key Risk for Some Chinese Banks

Fitch Ratings-Shanghai/Singapore-07 March 2016: The continued rapid growth in wealth management products (WMPs) invested through Chinese banks could be a key source of credit and liquidity risk for certain financial institutions, says Fitch Ratings. The fast rise in WMPs is closely connected with the continuing growth in domestic credit, and they are accounting for an increasing proportion of funding at Chinese banks - especially mid-tier institutions.

Recently released data showed the outstanding balance of WMPs rising to CNY23.5trn (USD3.6trn) at end-2015 from CNY15trn a year earlier, with an average of over 3,500 new products issued every week during the year. Nearly three-quarters of these are non-guaranteed WMPs; and over 60% of funds invested in WMPs come from retail investors, attracted by the higher rates of return than that for ordinary deposits. Importantly, they continued to grow faster than bank deposits, resulting in WMPs equating to 16.8% of system deposits at end-2015, up from 13.6% at end-1H15. As a result, banks with large sales of WMPs relative to deposits could face liquidity and funding pressures in the event of renewed market volatility.

FT: Bank acceptance bills, newspapers and fraud in China

To complicate things further, in most of the above transactions, there exist middle­men or bill agents, which liaise with and coordinate the two or three banks involved. The demand for agents arises because when a corporate discounts a bill at a bank, it can take a long time and may require fees. The corporate thus sells the bill to an agent, who with a shorter processing time will give the corporate cash up­front; the agent collects bills from many corporates and then re­discounts them at various banks in its network. The agents are not licensed banks and fall through regulatory checks. This additional layer thus creates operational risk.

Multiple sale: For example, an agent may sell the bill multiple times to different banks, if they fail to check the documents. The agent thus obtains leverage, which it can invest in other assets, such as the stock market. The arrangements can fall apart when these other investments fail to bear fruit.

Lots more at the link.