China is readying twin initiatives to curb opaque financing practices that threaten the stability of the country’s US$864 billion investment trust industry and booming corporate paper market, sources with direct knowledge of the plans told Reuters.
The moves, coming separately from the People’s Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC), form part a campaign to clean up China’s financial system as it opens up domestic capital markets to diversify funding options for cash-strapped firms in the world’s No 2 economy.
Two sources close to the CBRC said China’s big four managers of bad loans – so-called asset management companies (AMCs) – will be banned from lending directly to investment trust companies under the pretext of acquiring bad debt.
Meanwhile, continuing a clampdown on the corporate bill that began in 2011, the PBOC will, from next year, stop bankers acceptances and similar products from being used to camouflage off-balance-sheet lending to firms, sources with direct knowledge of the situation said.
Trade in commercial bills began to cause concerns in Beijing when the economy showed signs of overheating on a flood of cheap credit in 2010 and issuance of such notes exploded.
Neither the CBRC nor the PBOC provided comment on their plans when contacted by Reuters.
The initiatives could provide reassurance that Beijing is serious about rooting out hidden risks that investors fear lurk in a financial system dominated by state-controlled banks and government-backed business.
For years, China has shuffled bad debt that was run up by big state firms between state banks, other state companies and the government in labyrinthine deals that hid the cost of bad banking, and shielded un-viable state enterprises from bankruptcies.
These losses lurk in the system unaccounted for, tarring banks’ and China’s fiscal health, and frustrating potential investors who say Beijing quashed the bad debt market by refusing to sell dud loans openly to protect state firms from creditors.
The new rules take aim at two key areas – real estate and lending to China’s biggest, mainly state-backed, firms.
“Right now, asset management companies are focusing their main acquisitions among property trusts,” one of the sources with knowledge of the CBRC plan said.
“The new rules are obviously targeting areas in the property trust sector vulnerable to problems,” added the source, who is not authorized to talk to the media.
Property trusts absorb nearly 13 per cent of China’s total trust investment and have been pressured in the past year as falling home sales strain developers’ ability to repay loans.
Some developers have sold land or half-finished projects held as collateral with trusts to repay debts, with the four AMCs emerging as buyers, Chinese media have reported.
That raises the risk of collateral being pledged twice, or that developer simply uses land to raise fresh loans to fund another unviable project.
Chinese trusts are essentially private capital funds that get money from rich individuals and wealth management arms of Chinese banks on the hunt for lucrative investments.
They had RMB5.5 trillion (US$864 billion) of assets as of the end of June, and had RMB5.3 trillion of cash to invest, data from the China Trustee Association showed.
Property trusts have boomed in the past two years after Beijing banned real estate developers from borrowing from banks, or raising money in public capital markets in an attempt to dampen record rises in house prices.
Meanwhile the target of the new PBOC rules is the trade in vaguely endorsed, repeatedly discounted corporate bills, which change hands in an intermediate market of “bridge institutions” that regulators fear impair transparency in the financial system.
These bills are notes from a firm instructing a bank to pay a specific sum to a third party payee on a particular date. But if the payee needs the money earlier, it can cash the bill early for a discount – either at the same bank or a different one.
The discounted bill is recorded on the bank’s balance sheet, but Chinese banks that wish to decrease the amount of loans that appear on their balance sheets may use repurchase agreements with domestic brokerages, trust firms, wealth management products or rural credit cooperatives to temporarily erase the asset from their balance sheets in order to avoid breaching loan-to-deposit ratios or other lending restrictions.
According to PBOC data, undiscounted corporate bankers acceptance notes increased by RMB608.9 billion (US$95.65 billion) in the first half of 2012, on track to match or exceed the RMB1.02 trillion increase China posted in 2011.