Turmoil at a small Chinese dairy company is shedding rare light on the final destination for some of the nation’s estimated US$8 trillion of shadow banking loans.
Jilin Jiutai Rural Commercial Bank Corp (吉林九臺農村商業銀行), a major creditor to embattled China Huishan Dairy Holdings Co (中國輝山乳業), said late on Tuesday it has extended a total of 1.35 billion yuan (US$196 million) in credit to the dairy producer, including 750 million yuan through the purchase of investment receivables from a finance leasing company.
Investment receivables — a category that can include using wealth-management products, asset management plans and trust-beneficiary rights to disguise what are in effect loans — allow banks to reduce the amount of cash they need to set aside for capital and provisions for loan losses.
The practice of recording loan-type exposures on balance sheets under categories including investment receivables has allowed hundreds of smaller Chinese banks to boost assets and profits. At the same time, it has created opaque risks that could lead to failures, bailouts or liquidity shocks with the potential to jolt national and global markets.
Jiutai’s external public relations agency did not immediately reply to an e-mail seeking comment. The bank does not appear to have broken any disclosure rules on its receivables.
China’s shadow banking system could lead to losses of US$375 billion, CLSA Ltd estimated in September last year.
The brokerage said such financing expanded at an annual 30 percent pace from 2011 through 2015 to reach 54 trillion yuan, or 79 percent of the nation’s GDP. However, details have rarely surfaced on the specifics of individual shadow banking arrangements.
“Chinese banks are lending more and more money to companies in recent years through investment receivables, partly to circumvent regulatory or internal rules,” said Yulia Wan (萬穎), a Shanghai-based banking analyst at Moody’s Investors Service.
Lenders do not disclose enough information about where the money goes, Wan said.
In addition, the banks usually do not provision enough for such exposures and they fund the transactions through short-term borrowing from other financial institutions, Wan said.
“This practice poses risks to both investors and banks themselves,” she said.
While China’s shadow financing system is smaller and less complex than in developed markets, the challenges include poor disclosure, which hampers investors’ assessment of risks. Chinese financial regulators have taken steps since August last year to limit exposure at smaller lenders that used short-term interbank borrowings to boost investments in opaque products issued by other financial institutions.
Huishan Dairy on Monday called a meeting with eight creditors asking them not to call in outstanding loans, delay new loans or file lawsuits, according to a message posted yesterday morning by Hongling Capital (紅嶺創投) chairman Zhou Shiping (周世平) in the company’s media WeChat group.
The P2P lender has brokered loans to Huishan.
Jiutai said in its Tuesday statement that there have been no defaults on interest due from the 1.35 billion yuan in total credit to Huishan Dairy, which includes 750 million yuan extended on Dec. 1 last year and 600 million yuan on March 7.
The lender also said it would take all necessary measures to ensure the security of the credit.
About two weeks after the first loan, Carson Block, the short seller and founder of Muddy Waters LLC, issued a report alleging that Huishan Dairy was worth “close to zero.”
Jiutai had total assets of 191 billion yuan as of Dec. 31 last year, of which 31 percent was categorized as loans, according to its annual report.
The report listed the size of Jiutai’s 10 largest loans, the biggest of which had an outstanding amount of 615 million yuan. That suggests the bank did not categorize its 750 million yuan Huishan transaction on Dec. 1 as a loan.
Jiutai’s investment receivables amounted to 11 billion yuan, or 5.6 percent of the bank’s total assets. The figure for Jiangsu Jiangyin Rural Commercial Bank Co (江陰農商銀行), another rural lender, was 0.86 percent.
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