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Chinese banks’ shadow lending increases despite new regulations

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Despite new regulations set earlier this year, in April, Chinese banks have continued to increase their shadow lending portfolios. The majority of banks, categorized as mid-tier, have been using shadow loans in order to use less of the bank’s capital, while also being able to offer better returns for their customers. However, through this process, banks can also successfully mask their balance sheets, making it harder for China’s regulatory bodies to assess the volume of loans that are currently active in the economy.

A recent study shows that China’s leading shadow lender, the Shanghai Pudong Development Bank (SPDB) has increased its shadow lending portfolio by 14% in the first 6 months of 2016 alone. The increase results in a current portfolio of over 1.27 trillion yuan – 190 billion dollars. According to the same study, a similar portfolio is also offered by Industrial Bank Co., ending the 2nd quarter at 1.23 trillion yuan – 184 billion dollars. This comes after an increase of approximately 4.5% in their shadow lending assets. In Industrial Bank Co’s case, the shadow lending portfolio accounts for 63% of their total loan assets.

Furthermore, at least 5 other banks have also increased their shadow lending portfolio, despite the new regulations, by at least 9%. However, two banks – Minsheng Banking Corp and Zheshang Bank Co, have both reported an increase in their portfolio of over 80%. On the other hand, China Merchants Bank Co., is one of the very few banks who managed to reduce the amount of shadow loans in the first 6 months. With a 23% decrease in assets, it currently holds approximately 530 billion yuan – 80 billion dollars.

According to China’s Banking Regulatory Commission (CBRC), the new regulations published in April came after study results showed that shadow loans had reached a historical amount of 12.6 trillion yuan – approximately 1.9 trillion USD. The CBRC reports that this amount is equal to more than 5 times China’s reported economic output from 2015. More importantly, the credit rating agency Fitch reported in July that shadow loans make up for more than 30% of the country’s loans.