Published: 24th May 2016 11:45am
A huge amount, but according to the latest report from the China Banking Association, wealth management products sold by Chinese banks have so far raised 15.88 trillion yuan (US$2.4 trillion) in financing for the real economy, an increase of 48.27% on last year.
This comprised 67% of China’s booming WMP market, which reached 23.5 trillion yuan by the end of 2015.
The report advises that such WMP funds were invested via bonds or fixed income like securities (credit instruments, trust loans, etc.) into non-government or non-financial firms. In other words providing liquidity to private enterprise that drives real Chinese economic growth.
This is still the key benefit of shadow banking in China, where state banks skew lending to other state entities.
Yet with the evils of leverage under the spotlight during this politically sensitive climate, perhaps this is exactly the message Chinese banks want to deliver as they generate sales commissions churning wealth management products to retail investors.
Local media reports highlighted this trend last year, whilst Deutsche Bank in a recent report picked up on Chinese banks “self dealing as a way to make up for declining profit margins”. (see also my quick take for CER).
For sure there is no shortage of demand from Chinese savers, who face miserable savings account returns. As this recent headline warns, readers who “deposit 100,000 yuan will actually face a net loss of 537 yuan after one year”, due to the effects of negative real interest rates.
Question marks also surround whether or not these funds did indeed reach the good parts of the real economy. One incentive for the banks is to use WMPs to disguise risky loans as ‘investments’.
Fitch warns this practice known as channel lending, is more often than not used to provide credit to “cash-strapped property developers” who are unable to obtain formal loans.
And as ever when dealing with Chinese statistics, particularly any relating to Chinese shadow banking, the same disclaimers apply.
However there is a more concrete concern, one which I raised last year in this EIU analysis, which is this CBA report shows that last year, effectively 5.17 trillion yuan of lending to the real economy was diverted away from the official banking system.
This results in sizable capital flows escaping stricter risk oversight, and more immune to the effects of government monetary policy.
For a more in depth analysis of Chinese shadow banking, look out for updates from Frontiers of Finance in China, where the #CNflow newsletter has now migrated to.
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