Risks in China's $11 trillion shadow banking loans

BEIJING • Turmoil at a small Chinese dairy company is shedding rare light on the final destination for some of the country's estimated US$8 trillion (S$11.2 trillion) of shadow banking loans.

Jilin Jiutai Rural Commercial Bank, a major creditor to embattled China Huishan Dairy Holdings, said on Tuesday it has extended a total of 1.35 billion yuan (S$273.6 million) in credit to the dairy producer, including through the purchase of investment receivables from a finance lease company.

Investment receivables 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. It has also created opaque risks that could lead to failures, bailouts or liquidity shocks with the potential to jolt national and global markets.

China's shadow banking system could lead to losses of US$375 billion, CLSA estimated in September.

It said such financing expanded at an annual 30 per cent pace from 2011 to 2015 to reach 54 trillion yuan, or 79 per cent of the nation's gross domestic product.

"Chinese banks are lending more and more money to companies in recent years through investment receivables, partly to circumvent regulatory or internal rules," said banking analyst Yulia Wan.

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.

The nation's financial regulators have taken steps to limit exposure of smaller lenders which used short-term interbank borrowings to boost investments in opaque products issued by other financial institutions.

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A version of this article appeared in the print edition of The Straits Times on March 30, 2017, with the headline 'Risks in China's $11 trillion shadow banking loans'. Print Edition | Subscribe