China loan-sale practice

The transactions at issue had enabled banks to move loans off their balance sheets by temporarily selling them to Chinese trusts, lightly regulated companies that then repackaged the loans into financial instruments for clients. The banks promised to repurchase the loans any time between a few weeks and a few years later.

The China Banking Regulatory Commission issued a notice banning banks that sell loans to trusts from removing the loans from their balance sheets, said an executive in the risk management department of a Chinese bank who has seen the document. The notice was issued on Dec. 24, but wasn’t made public.

Chinese newspapers have reported that it was sent to all Chinese banks.

While no official data on the loan-sale practice is publicly available, Shanghai Benefit Investment Consulting, a research company, estimates that 734 billion yuan ($107.53 billion) of bank loans were packaged into trust products in 2009. About 80% of that was issued in the second half of the year, as Beijing’s concern about loan growth mounted.

Not all the loans sold to trusts fall into the category barred by the CBRC notice, but the order appears to have nearly halted such transactions. According to Shanghai Benefit, only seven new trust products backed by banks loans have gone on sale this month, compared with 465 for the whole of December.

“It’s become a lot harder to get approval for new products,” said Tang Liqiong, an analyst at Shanghai Benefit, adding the banks loaded most of their new issuance into the beginning of December as rumors circulated Beijing might rein in the practice.

Source : Konaxis

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