China took another step to clamp down on leverage in the financial system, ordering banks to ensure that they are not exposed to risks from their entrusted loan business.
Banks can only act as intermediaries when arranging entrusted loans and must not provide guarantees or get involved in decisionmaking, according to new rules posted in a statement on the China Banking Regulatory Commission’s (CBRC) Web site over the weekend.
The CBRC’s measure is the latest attempt by China to curb the threat that excessive leverage in the financial system poses to the nation’s economy. Chinese President Xi Jinping (習近平) and his senior economic officials have vowed to make controlling financial risks a top priority, a pledge renewed at the Chinese Communist Party’s 19th National Congress in October last year.
The entrusted loan business, which normally involves companies providing finance to each other with banks acting as intermediaries, has seen “certain potential risk hazards” due to rapid growth and a lack of regulation, the CBRC statement said.
Entrusted loans cannot be used for investments in bonds, derivatives, asset management products or equities, the CBRC said, adding that banks cannot put their own money or funds that they manage into such loans.
Entrusted loans contain higher credit risk because they are less regulated and often extended to risky areas, such as property developers, RHB Securities Hong Kong Ltd analyst Terry Sun said.
Higher yields offered by entrusted loans have prompted some non-financial corporates to put cash in such offerings, he said.
“This would magnify system leverage and push up funding costs for the real economy,” Sun said.
The CBRC’s measure should therefore “reduce leverage and the circulation of capital within the financial system,” he said.
The new CBRC rules will have limited effect on Chinese banks’ revenue because the entrusted loan business was already on the decline, following rapid growth in the three years to 2016, China International Capital Corp (CICC, 中國國際金融) analysts including Victor Wang said in a note.
Investments through entrusted loans reached 7.4 trillion yuan (US$1.14 trillion) at the end of 2016, the CICC analysts said.
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