China’s Financial System a Conduit for Channelling Funds to Infrastructure, Real Estate: CASS Report

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A new research report from one of China’s leading think tanks indicates that asset management companies are serving as a conduit for channeling funds from the banking sector to infrastructure and real estate investment.

The report released by the Chinese Academy of Social Sciences National Institution for Finance & Development in conjunction with China Zheshang Bank on 25 July says that the source of most of the funds used by asset management companies remains the traditional banking sector.

Entitled “Where’s the Money?: Fund Flows and Mechanisms Under the the Broader Asset Management Framework” ( 钱去哪了:大资管框架下的资金流向和机制), the report further notes that these funds tend to be channeled towards infrastructure and property projects.

“Bank loans, non-bank financial institution funds as well as the bond market, which has seen rapid growth in recent years, have all to a significant extent become conduits for channeling capital resources towards infrastructure and real estate,” said the report.

The report claims that its findings mean recent figures pointing to a decline in the contribution of the banking sector to credit creation and a compensating rise in the role of non-bank financial institutions are misleading, as they do not take into account the channeling of bank funds by the latter.

Official data indicates that China’s total social financing – a broad measure of credit and liquidity in the economy, was 181.92 trillion yuan in 2016, with banks accounting for 159.51 trillion yuan, or 87.19%, of credit creation.

The 2016 figure marks a gradual decline in the banking sector’s share of total social financing over recent years, and a corresponding rise in non-financial institutions since the turn of the decade.

While non-financial institutions accounted for only 5% of total social financing in 2009, this share has since more than doubled to 12.21% as of last year.

Yin Jianfeng, China Zheshang Bank chief economist and NIFD vice-chairman, points out however that “the main source of money for non-financial banking institutions is actually still the banks,”

The report’s data indicates that banks held 26.5 trillion yuan in creditors rights with respect to other financial companies as of the fourth quarter of 2016, comprising 36.7% of financial sector debt, and marking a year-on-year increase of 10 trillion yuan.

In the first quarter of 2017 this amount had risen to 27.8 trillion yuan, accounting for 38.5% of financial sector debt.

With respect to the final destination of this investment, the report notes that “after non-bank financial institutions obtain financing that includes bank funds, a significant part of capital usage is directed at local government infrastructure and real estate projects.

According to the report’s rough estimates, of the 25 trillion yuan provided by non-bank financial institutions to the real economy at least 30%, or around 8 trillion yuan, is directed towards real estate or regional infrastructure projects.

This trend is consistent with the usage profile of conventional loans made by banks. According to the report’s rough estimates as much as 56% of all lending in 2015 was directly or indirectly related to real estate.

The report conjectures that if 50% of all bank loans were similarly used last year, as much as 60 trillion yuan was directed towards either real estate or infrastructure via conventional lending by banks in 2016.

The report concludes that as much as 40% of all bank assets, or 80 trillion yuan, could be tied up in infrastructure or real estate projects when this conventional lending figure is added to the bank’s holdings of local government bonds (approximately 10 trillion yuan), municipal debt (approximately 1.2 trillion yuan) as well as financing of non-bank financial institutions (approximately 8 trillion yuan).

 

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