No Need to Worry about China’s $38 Trillion in Off-balance Sheet Assets: UBS


The copious volume of off-balance sheet assets accumulated by Chinese shadow banking activity poses little threat to the integrity of the financial system, says UBS Group AG.

The Chinese finance sector had accumulated 253 trillion yuan (approx. USD$38 trillion) in off-balance sheet items by 2016, prompting regulators to launch a concerted campaign against shadow banking activity.

Despite the copious volume of off-balance sheet assets, Jason Bedford, a Hong Kong-based analyst at UBS, said that a major financial system upset is “very unlikely,” as over two thirds of it consists of benign items such as untapped credit-card limits and custodial funds.

Bedford’s November 15 report looked at 282 bank filings from 2016 and the first half of 2017 to conclude that on balance sheet growth is outpacing off balance sheet expansion, and that only 31% of the 253 trillion yuan off-balance sheet total harbours “meaningful risk, in the form of isolated items such as asset-backed securities (ABS) or guarantees.

“A significant portion of off-balance sheet exposures are composed of benign, no-risk or low-risk items,” said Bedford. “The failure to distinguish the risk between these items and other high-risk or contingent off-balance sheet liabilities has often led to an exaggerated risk perception among many market watchers.”

Even ABS, whose issuance has skyrocketed 3,450% since 2013, is”not quite the red flag it might appear to be,” as “the rapid growth in securitisation has occurred in a highly regulated environment and it would appear to be part and parcel of a broader opening and reform of China’s credit markets beyond bank balance sheets.”

Market observers have expressed keen concern about the burgeoning pile of debt accumulated by China since the Great Financial Crisis, as well as accompanying expansion of the shadow banking sector.

Earlier this year both Moody’s and Standard & Poor’s downgraded China’s sovereign credit rating, citing concerns over its rising debt-to-GDP ratio.

A recent report by Moody’s points out however, that Beijing’s regulatory crackdown has proved effective at taming the Chinese shadow banking sector, which had ceased to grow by the first half of 2017.