Regulatory Crackdown Follows Rampant Growth in Balances of Chinese Banks

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The China Banking Regulatory Commission has launched a campaign of unprecedented scope and intensity against misconduct in the lending sector, as part of efforts to forestall financial risk and deleverage the economy.

In the six months prior to April CBRC released a total of 5 guidance documents directed at the banking sector, capped by a circular calling for banks to step up self-investigation of what it refers to as “regulatory arbitrage, empty transfer arbitrage and affiliate arbitrage.”

At the start of April CBRC released two more key documents, the first announcing a campaign to purge the banking sector of “improper innovation, improper transactions, improper incentives and improper fee collection” in the banking sector, and the second providing 35 guidance opinions to clarify risk prevention and control.

In addition to the rapid-fire release of a string of regulatory and policy documents, CBRC has also adopted more concrete measures by imposing fines worth 42.9 million yuan upon a total of 17 lenders at the end of March, for infractions including the concealment of non-performing loans, abuse of channels, violations of state macro-economic policies and improper fee collection.

CBRC followed this tsunami of penalties by announcing the launch of a further round of investigations against legal or regulatory breaches by lenders on 7 April.

According to Jiang Chao, chief macro-economic bond researcher with Hai Tong securities, this unprecedented crackdown on China’s banking sector follows the rampant use of dubious means by lenders to boost balance sheets over the past several years.

“In order to increase profits, banks have engaged in large-scale expansions over recent years, and made allocations to high-return assets via methods such as interbank arbitrage and regulatory sidestepping,” said Jiang.

The on-balance sheet assets of large-scale Chinese banks expanded by more than 10 – 12% per annum from 2013 to 2016, while small and medium-sized banks posted even more rapid growth rates of 16 – 26% over the same period.

As a key means of dodging regulatory constraints and inflating assets, interbank operations have posted frenzied growth over the past several years.

Interbank deposit issuance more than doubled from 5.3 trillion yuan in 2015 to hit 13.02 trillion yuan last year, while the figure for 2015 was nearly six times that for 2014.

CBRC is especially concerned by this form of “regulatory arbitrage,” and recently flagged plans to crackdown on the abuse of interbank deposits in official documents.

The the view of regulators a surfeit of interbank lending comprises a form of “empty transference” between financial institutions, and that the longer the “arbitrage chain” extends the greater the cost of capital for members of the real economy, as well as the greatest the amount of risk accumulated by the financial sector.

Off-balance sheet assets have also seen frenzied growth in recent years, nearly tripling from around 10 trillion yuan at the end of 2013 to over 29 trillion yuan at the end of last year.

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