For China, Kicking a $9 Trillion Habit Is Tough
Comment of the Day

June 27 2019

Commentary by Eoin Treacy

For China, Kicking a $9 Trillion Habit Is Tough

This article by Anjani Trivedi for Bloomberg may be of interest to subscribers. Here is a section:

For now, Beijing doesn’t appear to have many options: The fact that activity is picking up even as officials attempt to calm nerves in the interbank funding market shows the economy’s deeply rooted, steadfast reliance on these institutions for credit, especially when banks are flinching.

For years, trust companies worked alongside China’s banks to keep credit flowing in the system. The headline drop in their assets under management has largely come from a decline in trust beneficiary rights products. These are loans put in a trust special-purpose vehicle, which effectively allows banks to reclassify souring debts. Trust companies have also acted as agents between companies lending to each other. Together, so-called entrusted loans and trust loans stood at 20.1 trillion yuan at the end of the first quarter.

Most of trust-backed products are concentrated at regional lenders – the likes of Baoshang Bank Co., which was recently taken over by regulators. In the early part of 2017, such products, in the form of investment receivables, increased between 10% and 40% at smaller banks. At Baoshang, they rose close to 15% and stood at 153 billion yuan, or a quarter of its assets, according to its latest financials.

Eoin Treacy's view

When I was the Bloomberg account manager for DWS in Luxembourg back in the early 2000s one of the primary roles the team had was to create special purpose vehicles for loans of dubious quality that management of Deutsche Bank wanted to keep off book. We all know how that turned out and the bank is still reeling from its experiment with balance sheet leverage.

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