Chinese Banks Tighten Up Lending, Find Alternative Means to Shift Assets Off Balance Sheet


Beijing’s deleveraging campaign is compelling Chinese banks to tighten lending in the run up to the end of the year, as well as prompting some to turn to more covert financing methods to engage in regulatory arbitrage.

China Securities Journal reports that some of the country’s biggest banks have already exhausted up their lending quotas for 2017, forcing them to cut down on credit extension in the final quarter.

“This year market liquidity has continually been quite tight, and the rise in costs for banks on the liabilities side may also be making them more cautious when it comes to providing loans, prompting them to focus more on higher yield assets,” said one banking executive.

“The broader liquidity environment has also made bank quotas this year significantly tighter than in previous years.”

China Construction Bank, China Merchants Bank, and the Industrial and Commercial Bank of China are just some of the banks who have all but exhausted their lending quotas for the year, compelling them to cut back on lending or defer the provision loans until 2018.

“We can approve loans, but when we can provide them is hard to say,” said one loans manager at one major joint-stock commercial bank. “Our bank’s mortgage rate is currently 10% above the benchmark, while some customers who want the money quickly are actively adding 5 basis points to this foundation.

“Those customers who won’t raise the rate can only wait.”

Other bank managers have reported a marked slowdown and reduction in consumer loans, as well as completely inability to provide funds for business loans, or else the need to wait at least a month before granting approval.

Tightened quotas have also led to an ongoing rise in interest rates, with one executive from a big four Chinese bank telling China Securities News that rates are 6% above the benchmark for blue chip state-owned enterprises, while for standard enterprises the premium can run as high as 30%.

Moody’s analysts Xu Jing points out that in addition to the tightening of loan quotas by regulators, the first three quarters of 2017 saw lender rapidly increase on-balance sheet loans in response to the crackdown on shadow banking activity that has stymied other forms of credit extension.

“[We] can see that bank loans have been a key factor in the comparatively high growth in social financing this year, driven primarily by medium-to-long term corporate loans and household loans.”

Banks are still seeing strong demand for funds from China’s real economy, prompting many to turn to alternative forms of credit extension to engage in regulatory arbitrage and dodge lending quotas.

Heightened scrutiny from regulators, however, it prompting a shift in the means they use to provide alternative financing.

“In the past the most common method was to have the banks serve as capital contributors, making use of trust companies, fund subsidiaries, brokerages or other channels to directly provide funds to the financing parties, while banks retained rights as beneficiaries,” said one industry observer to China Securities Journal.

“However, following stricter regulation, the use of fund subsidiaries and brokerages as channels has shrunk considerable, putting a squeeze on this method.

“The use of asset securitisation to shift [liabilities] off balance-sheet or transfer of registration at the China Credit Assets Registry & Exchange (信贷资产登记流转中心) satisfies regulatory requirements and is more in compliance, becoming mainstream method at present.”

Data indicates that the credit asset securitisation issuance scale reached 322.031 billion yuan for the first three months of 2017, for a year-on-year leap of 56%.

China Everbright Bank credit analysts Yuan Jiwei has also written a report pointing out that registration transfers with the China Credit Assets Registry & Exchange has emerged as one of the key means for banks to shift credit assets off their balance sheets in 2017.