A Look at Credit Risks from Shadow Banking
The China Banking Regulatory Commission recently issued draft guidelines on financial risk with the shadow banking sector as one of the main concerns. In sought comments on its Comprehensive Risk Management Guidelines for Banking Financial Institutions,which emphasize the need for "comprehensive risk management guidelines for banking financial institutions to assess the correlation between the risks,examining the impact of these risks and preventing cross-border and cross-sector business risks. In June,Zhou Xiaochuan,the governor of the central bank,told an International Monetary Fund event that China would launch a series of regulatory institutional reforms to control the activities of shadow banks in order to eliminate a supervisory vacuum.
Financial market regulators have once again raised the issue of risks from the shadow banking sector,insisting that risk management needs to cover the entire financial sector. They maintain that the economic downturn has made the entire financial system more vulnerable,and in the face of increased market volatility it is imperative that regulators address the accumulated credit risks to avoid systemic risks.
In the debt financing system,the optimum projects always prefer the low-cost financing channels. Bond is the cheapest form of financing,with costs that are 1-2 percentage points lower than bank loans. Generally speaking,central government-owned companies,large state-owned enterprises,and other big companies with a good credit track record,tend to rely on issuing bonds to meet their financing needs. Bank loans are the second choice since their interest rates are also relatively low,albeit slightly higher than bonds. For most companies,bank loans are the first choice because they are easier to obtain than bonds. So banks are usually viewed as the frontline in the prevention and control of credit risks. Improvement in the risk control system would help assess the risks of all the different types of financing bodies from the biggest central government-owned companies to the smallest private businesses. However,the higher threshold for borrowing from banks often shuts the door to some enterprises and individuals who fail to meet the requirements of bank lenders and have to resort to the higher cost financing channels,such as the trust funds and asset management products,private loans,P2P platforms and other finance companies.
Frequent 'Risk Events'
The continuing downturn of China's real economy has led to many "risk events" in the debt financing market and that has created problems for the banking industry. Private borrowings and P2P lending are among the areas most vulnerable to defaults. There are greater levels of exposure to credit risk in groups of entities with good credit as well as weaker ones.
In the first half of the 2016,there were 36 bond defaults involving over 20 billion yuan. Bonds are the staple of bank wealth management products. Frequent defaults once caused less credit loan products as well as the outsourcing businesses. Bonds,as the best credit financing tool,have also been a key factor in the rising levels of risk in the credit markets.
Since 2013,the risks from non-performing assets in the banking business have gained public attention. As of the end of March,the non-performing loan rate in the banking sector overall was 1.75%,an increase of 0.08 percentage point from the end of February. The January-March period also saw the 11th consecutive quarterly rise in the non-performing loan rate. Over the same period,bank coverage in provisions for bad debt was 175.03%,6.15 percentage points below the level at the end of February,and 120.48 percentage points lower than the record high reached at the end of 2012. It can be deduced that if provision levels reach the peak of 295% level,the non-performing asset rate would be nearly 4%.
The low transparency of the high-cost segment of the financial sector and the mysterious non-performing data suggest we need more examination of this issue. Since 2014,defaults and the loss of the connection of the private loan businesses have become more and more common,hence making a rather devastating environment for the private loan sector,even in the once-flourished regions of the private loan businesses. Since 2015,the frequent "risk" events in the internet financing sector have been attributed to the high risks of non-performance. As of the end of June,there were 1,778 cases of problems in the P2P sector,or almost three-quarters as many as those operating normally. There were 896 newly built financing platforms in all of 2015,and another 515 in the first half of this year. Meanwhile,offline wealth management companies suffered serious problems as well,among them the Fanya Metal Exchange,Ezubao of the Yucheng Group and the DaDa Group all coming under scrutiny for improperly raising funds.
Dealing with Credit System Risks
The asset management sector is a relatively late starter. It still has huge room for growth but relatively weak regulatory and management rules. Therefore,it is of top priority that there is an improvement of regulatory and management institutions along with related rules and laws. Efforts are being made to comprehensively deal with the private equity funds,internet financing,bank financing,trust products,insurance company asset management operations and asset management subsidiaries of brokerages and fund management companies.
Since 2015,China has been overhauling its internet financing sector,especially P2P lending and offline wealth management companies. In March,the China Insurance Regulato