China Rethinks Anti-Shadow Lending Campaign

Small business lending among China’s banks is, surprisingly, on the rise. But in the nation grappling with an economic slowdown, shadow lending has been a problem for years and one regulators haven’t quite been able to tackle.

Reports on Friday (May 6) from The Wall Street Journal said the China Banking Regulatory Commission (CBRC) is once again hoping to get a leg-up on shadow lenders, unregulated players that are able to disguise bad loans.

But, reports said, authorities are taking a targeted approach to the problem.

The regulator is combating credit beneficiary rights. “Beneficiary rights confer on the buyer the right to a stream of income without ceding actual ownership of the underlying asset,” reports explained.

Those assets, reports continued, are often corporate loans and are often already nonperforming. The product can be sold between banks, but the CBRC is now warning financial institutions not to invest in them.

Banks have done so because selling the credit beneficiary rights to another FI means they can write off the transaction as an investment receivable, allowing the seller to allocate just a fraction of the capital provisions that it has to do with a traditional loan.

Collectively, the nation’s credit beneficiary rights are calculated at $3.6 billion — less than 1 percent of total receivables, Bernstein Research Senior Analyst Wei Hou told the publication. But, by targeting this category in particular, regulators are hoping to gain more traction against these disguised loans.

The initiative has launched in the form of Notice No. 82, but, said reports, officials have not discussed the directive publicly and have declined to comment on the matter.

News of the directive emerged the same day that separate reports from The Telegraph highlighted the rising global corporate debt problem, made worse by China’s economic situation.

Over the past decade, corporate debt has ballooned to $25 trillion in emerging markets, reports said. The data led the Institute of International Finance to issue a warning on corporate debt, which coincided with the Hong Kong Monetary Authority’s own public concerns.