THE 30% increase in wealth management products (WMPs) held
in off-balance sheets of Chinese banks is potentially destabilising but in the
short term, it is unlikely to have a major impact.“This is given that China
still has ample reserves,’’ said Chris Eng, head of research, Etiqa Insurance
& Takaful. “But it is surprising that it grew by 30%.’’“It is certainly a
potentially destabilising factor,’’ said Pong Teng Siew, head of research,
InterPacific Securities.
The expansion of this form of shadow banking, which grew to
US$3.8 trillion, with money eventually being diverted to quasiloans and bonds,
outpaced the 10% growth for normal lending during the same period, raising
risks for the broader economy and undermining the country’s “deleveraging”
efforts, said Bloomberg, quoting the People’s Bank of China (PBoC) in its
quarterly monetary policy report.There is concern over risks associated with
high yielding products.“The issue is that with high yields, the funds obtained
via WMPs may well be invested into risky classes of companies, sectors,
ventures, assets and derivatives.“These can entail asset liability and maturity
mismatches that can easily lead to a liquidity crunch, if the underlying
investment turns sour, for whatever reason,’’ said Suhaimi Ilias, group chief
economist, Maybank Investment Bank.
However,any adverse development can spoil the current global
reflation story.“Even though China’s WMPs are not necessarily ‘integrated’ with
the global financial system and more ‘local’ in nature, any adverse development
can be a spoiler to the current global reflation story.“Among other factors,
that is based on China’s economic growth stabilising and picking up, together
with the acceleration in inflation, that have buoyed equity and commodity
markets,’’ said Suhaimi.
In fact, there are mounting concerns in China on three
highly interconnected risks which could spill over to the formal banking
sector, said Lee Heng Guie, executive director, Socio Economic Research Centre.
These are shadow banking (40%-70% of GDP); real estate bubble as well as high
public and corporate debt (about 255% of GDP at end 2015).“The size and opacity
of shadow banking activities in China has been an ongoing concern amidst the
regulator’s strengthened oversight on offbudget balance sheet lending from
trust companies, brokerages, microlenders, pawn shops and real estate
companies,’’ added Lee.
China’s credit expansion has sparked concern. Credit to
gross domestic product (GDP) has accelerated rapidly and surpassed 200% since
2015. In mid-2016, it stood at 210% (South Korea 195%; Singapore 150% and
Thailand 120%). In fact, Bank for International Settlements (BIS) has warned
that China’s excessive credit growth is signalling an increasing risk of a
banking crisis.“An early warning of financial overheating, as measured by the
credit to GDP gap, hit 30.1 in the first quarter of 2016,’’ said Lee, quoting
BIS. “Any level above 10 signals a crisis occurring in any of the three years
ahead.’’
“Equally
worrisome is the reaction in the financial markets to the government’s effort
to rein in credit, which has led to a sharp tightening of credit conditions.
This was evident in the recent spike in money market rates,’’ noted Zahidi.
A word of caution on any policy miscalibration. “In its
enthusiasm to address the problem of financial imbalances, a policy
miscalibration by the government could lead to financial market chaos.“PBoC’s
move to raise rates in the open market and on funds lent through the standing
lending facility has also impacted the entire yield curve. It is worth noting
that China’s bond market has corrected sharply in recent times.“And additional
policies to rein in credit could further dent the country’s already fragile
bond market,’’ said Zahidi.
Addressing the debt issue is critical. “Addressing debt
concerns in the coming years will be critical to avoiding a financial crisis
over the medium term. Investors fret that China will possibly avoid making the
tough decisions and favour status quo instead, heightening financial stability
risks in the future.“It is comforting that the Chinese government has unveiled
several measures aimed at mitigating the worst of the dangers. But it remains
to be seen just how effective these will be, as slowing economic growth
constrains the debt restructuring process,’’ said Lee.
China is shifting from growth to financial stability. “There
is also regulatory risk as PBoC is turning its attention to WMPs, much like the
previous attention on local government financing vehicles amid concerns over
local government borrowings and debt.“This can, among others, lead to a drastic
change in the belief or perception that there are implicit guarantees by the
government, something that has sustained the growth in WMPs,’’ said
Suhaimi.“The fact that the regulators are looking into this reinforces our view
that China’s policy this year is shifting from growth to financial
stability.“This can help to address the risk to China and global financial
systems arising from the growth in shadow banking,’’ added Suhaimi.