While China seems to have reasonably cooled both its economy and property market so far, given the slowing GDP growth recently reported and a recent nationwide decline in average property transaction prices, it’s now become clear that efforts to cool credit growth have been a complete failure:
In the first half 2010, according to trust company reports, the value of wealth management products cooperatively offered by banks and trusts rose to 2.6 trillion yuan, topping the previous year’s 1.77 trillion yuan.
This amount combined with the 4.58 trillion yuan in on-the-books, new credit issued by banks in the first half brought total lending in China through June 30 to near the 7.5 trillion yuan limit set by the government for all 2010.
Basically, they’ve already blown the full year loan growth target, and the year is only half over.
Tighter regulations have been circumvented via a giant loophole — Banks and trusts have colluded to expand credit in excess of limits by taking loan assets off of their balance sheets through the sales of ‘wealth management products’ to clients.
They’re packaging loans into ‘wealth management products’, which are then sold to investors, which removes them from the balance sheet and thus allows more loans to be taken on. This basic tactic should sound pretty familiar to Americans by now, given what happened with mortgage-backed securities sold to financial firms around the world.
This is how Chinese financial institutions are creating more aggregate lending than the government wants, and you know regulations have failed when the government resorts to scolding executives by phone:
“Banks have been fervent (lenders) during the past two months,” explained one official at the China Banking Regulatory Commission (CBRC).
Regulators trying to corral lending have not thrown in the towel. On July 2, they tried a fresh tactic: Regional CBRC officials started personally telephoning trust company officials to demand that they suspend all cooperative business with banks.
The CBRC official likened the latest order to “pouring cold water” on the banks’ lending scheme. Another regulator source said measures regulating bank-trust products will soon follow, and repackaged loans held by trusts soon may be limited by the same regulatory quotas affecting bank credit.
“The use of trust companies by commercial banks as a simple platform tool must be halted,” a CBRC source told Caixin.
Problem is, they’re going to have to do far more than simply ‘urge’ compliance. Watch this space, this is China’s weak spot in 2010.