We already know that local Chinese governments are concealing large debt liabilities off their balance sheets.
Now the Wall Street Journal reports that Chinese banks are using complicated financial instruments to move loans off their books.
The transactions, which spiked sharply last month, involve the banks selling their loans to third party companies, but promising to buy them back at a specified date ranging from a few weeks to a few years later.
Hey presto, the loan disappears from the bank’s records and no one knows whether it will turn out good or bad until the repurchase date arrives.
The banks are happy because they can reduce the size of their loan book at a time when the Chinese government is having second thoughts about authorizing the enormous flow of new credit that saw lenders issue 7 trillion yuan of new loans in the first six months of 2009.
Without the loans on their books, they don’t have to worry about increasing their capital reserves as a precaution against bad loans.
Those third-party companies then repackage the loans and sell them onto their clients. If any of this sounds familiar, it’s because it has echoes of the slicing and dicing of mortgage debt that got the US banks into such trouble.
As soon as the banks stop carefully overseeing their loan book and their clients, we get into a world of opaque and dangerous financial wizardry.
The WSJ has dug up data from Shanghai Benefit Investment Consulting that estimates that 603 billion yuan ($88.31 billion) of bank loans have been sold on and repackaged this year.
To put this figure into context, total new lending in November was 294.8 billion yuan. So that means the banks have managed to shift the equivalent of around two months of average lending off their balance sheets.
Some bank officials have already admitted that the practise is not exactly appropriate, but there seems no sign of any regulation from the government. Of course, we won’t find out how bad the situation is until several years down the line, but it’s another good reason to be wary of mainland bank shares.