A struggle to control lending in China has required ever-tougher rules against bank-trust cooperation
Despite regulatory directives aimed at preventing banks from removing loans off their balance sheets to dodge credit restrictions, China's banks did not slow down their pace in packaging loans as wealth management products.
Banks and trusts cooperated on wealth management products, effectively allowing them to shirk their responsibilities toward credit limits imposed nationwide under the central government's macroeconomic controls.
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.
"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.
Caixin learned from several sources that top government officials pushed for the latest across-the-board order so that the nation's banks would not use trust deals to exceed the government's prescribed credit ceiling for this year.
CBRC previously announced emergency suspensions of some bank-trust cooperation methods at the end of 2009, which violated banking regulation.
The commission's Non-Bank Regulatory Department issued two orders, the first of which said bank-trust cooperative wealth management products could not be used for investing in credit or note assets of an issuing bank. It also raised the threshold for investors to about 1 million yuan.
The second order prohibited banks from knowingly "selling loans," and required that they realistically ensure the authenticity of credit asset transfers.
Credit asset transfers had become a popular bank-trust product in the second half 2009 to help banks fulfill capital needs and meet regulatory requirements.
Banks sold credit assets to trusts, which in turn sold them to bank clients as wealth management products. At the same time, banks continued managing loan assets as a proxy to trusts, or even signing repurchase agreements.
Banks enjoyed several advantages: Loans came off the books and also provided service income. The technique also reduced capital pressure resulted from credit growth. And loans could be returned to bank accounting books at any time.
Despite the late 2009 orders from CBRC, "trust loans from bank-trust cooperation grew significantly in April and May," a commission official said. "Especially in May, the growth began surging. We often received text messages from banks marketing this type of wealth management product."
On June 1, CBRC convened an urgent meeting with the 12 largest of the nation's approximately 60 trust companies, asking that they slow bank cooperation. They asked that bank-trust cooperation at the end of June not exceed the level of deals posted on April 30.
The big trusts – including Yingda Trust, Guangdong Financial Investment Holdings, CITIC and China Credit Trust – basically followed the CBRC request. But banks balked, turning instead to small trusts for business, which led to a surge in bank-trust cooperation in June.
One bank source said the June rush to introduce bank-trust cooperative products was spurred by a fear of even tougher policies.
"Banks and trust companies both wanted to go all-out in issuing products before the policy brakes were applied," the source said. "So they grasped what opportunities they could."
Then came the CBRC clampdown. Decision-makers on July 2 chose to suspend bank-trust activity across-the-board primarily to stop what was considered excessive bank lending and keep nationwide, 2010 loan levels on target.
"With this kind of credit circulation, the consequences could be chilling," one financial expert warned.
New bank credit was within the bounds of CBRC limits early in the year if bank-trust wealth management products were not counted as new credit.
Statistics from the Yanglee Trust Workshop said 504 bank-trust wealth management products were issued in June – an average 20 products per bank per day – valued at about 777 billion yuan, up 30 percent from May.
By charging fees as well as commissions of up to 2 percent, banks earn more than trusts when they jointly market bank-trust products. Moreover, by cooperating with trusts, banks keep customers otherwise unavailable due to credit controls, since off-book business doesn't require bank capital and thus avoids CBRC capital constraints.
Trusts, on the other hand, don't rely solely on bank-trust cooperation business. "The suspension of bank-trust cooperation will not have dramatic effect on trusts," the CBRC source said.
The business volume of trust companies doubled between 2008 and '09, but the ratio of the profits from bank-trust cooperation to total profits declined. Bank-trust cooperation business accounts for nearly 60 percent of trust assets, but contribute less than 20 percent to total profits.
One industry insider predicted the suspension of bank-trust cooperation business would affect interest rates, further tightening capital supply and pushing up borrowing costs.
And as bank-trust cooperation has already become an important means for turning over short-term or soon-to-expire loans, the source said, the suspension may alter credit access in coming months, change the domestic money multiplier effect and tighten liquidity.
The source recommended CBRC regulate bank-trust deals and lending in the same way, while complementing dynamic oversight of bank-trust products.
A single regulation could not possibly eliminate non-compliant behavior, a bank source said. And proper enforcement would require additional, on-site inspections of banks and trusts.
The risk specialist also said tracking trust lending and linking these products to deposit-loan ratios or other indicators could reduce irregularities.
1 yuan = 1.4 U.S. cents