Frightened with Fitch on Wednesday.
The rating agency has looked at where Chinese lending is disappearing to — only to reiterate that rather too much is flowing into the black hole of informal securitisation.
A very black hole, as Fitch explains (our emphasis):
Fitch believes the vast majority of these transactions are not publicly disclosed by Chinese banks, and few, if any, traces of the loans remain in financial statements. The growing popularity of this activity is increasingly distorting credit growth figures at an institutional and system level, resulting in pervasive understatement of credit growth and credit exposure. Consequently, Chinese banks’ loan loss reserves and capital are more exposed to credit losses than current data suggests.
Not the most cheering of paragraphs, is it? And as Fitch continues:
Adjusted for informal securitisation activity, Fitch estimates that the net amount of new CNY loans extended in H110 was closer to CNY5.9trn, or 28% above the official figure of CNY4.6trn. While this difference may seem small when compared to the total stock of CNY loans for banks involved in this activity (roughly CNY34trn at end-June 2010), on a flow basis the volume of credit being shifted off balance sheets in recent times has been large and rising. Activity also is largely concentrated among just a few dozen banks, and institution-specific exposure is often much higher.
So much for containing the Chinese lending boom. Fitch estimates that there’s about RMB 2.3tn in securitised loans sat off Chinese banks’ balance sheets.
And the weird thing is that the China Banking Regulatory Commission is supposed to have banned trust companies — key originators of many loans — from packaging deals, so-called credit-equivalent trust products (CTPs).
But only temporarily. Previous reforms aimed at improving disclosure have had the opposite effect, Fitch says — for example with the wealth management products (Credit-WMPs) sold by banks:
Some banks very actively engaged in transactions last year are showing up in 2010 data as minimally involved, yet the bank’s own salespeople (responding to Fitch’s enquiries) state that business remains as strong as ever. Meanwhile, private placements of products to institutional investors are becoming more commonplace, most of which are never disclosed to any entity but the CBRC. Because of this worsening in disclosure, data from third-party providers is capturing less and less transaction flow, with as much as 40% of deals in H110 going uncaptured, versus less than 10% prior to end-2009.
Net issuance data don’t quite cover the problem, since the average size of CWMP ballooned by 50 per cent in the first half of this year alone — whether securitising loans alone or including ‘mixed assets’ such as bonds or, err, more loans to the same borrower. Click to enlarge the charts below:
According to Fitch, the market initially started with banks pushing the products out for loan quota compliance purposes — and hey, securitisation does help with balance sheet management. But demand mutated into its current form after investors began chasing yields outside China’s gloomy stock and property sectors. Banks have joined the party in a dash to keep depositors.
This doesn’t sound like it will end well.
And Fitch makes the point that the supposed saving grace of CWMPs and CTPs — they’re supposed to have good asset quality — is besmirched a bit by the products’ liquidity structure.
Institutions writing them commit to making specific levels of future repayments, often from a pool of products. In short, if asset quality became a problem, banks wouldn’t be able to do their normal trick of working out delinquent loans — they’d be forced to pay 100 per cent of the principal upfront or face reputational risk.
Still, on the bright side, investors see CWMPs as very safe so far.
But here’s a final bit on what Fitch calls the ‘unique product features’ of CWMPs:
Although broadly similar, informal securitisation in China differs considerably from traditional securitisations in some critical aspects: asset pools are usually very heavily concentrated; the lack of a secondary market means investors typically must hold positions until maturity; there is no tranching based on credit risk; and the roles of loan originator, product distributor, custodian, and loan manager are frequently commingled, and in practice sometimes all played by a single bank.
Few US-style stinky SPVs in China, then. But plenty of fetid CWMPs.
Related links:
China’s lending boom, illustrated – FT Alphaville
So tell us Mr Chinese official, do you have a debt problem? – FT Alphaville
The Chinese SIV – FT Alphaville
Are Chinese banks massaging their losses? - FT Alphaville