(Corrects paragraph 14 to show shadow loans equal to a fifth of
GDP, not five times)
* Shanghai Pudong has biggest shadow portfolio at $190 bln
* China Minsheng, China Zheshang portfolios rose 86 pct in
* Bank regulator trying to limit use of shadow lending
* Shadow lending disguises scale and risk of loan portfolios
By Shu Zhang and Matthew Miller
BEIJING, Sept 5 Shadow lending by listed Chinese
banks surged in the first half, underlining the challenges faced
by the country's banking regulator as it tries to rein in the
use of opaque lending structures that are seen as a threat to
China's lenders, led by the mid-tier banks, have been
increasing their use of shadow lending products for years, as
they can offer higher returns and tie up less of a bank's
capital than traditional lending.
But they also disguise the quality of a bank's balance
sheet, and sector-wide make it harder for regulators to assess
systemic risk and the volume of lending in the economy.
A Reuters analysis of bank filings shows Shanghai Pudong
Development Bank, a leading joint-stock lender,
increased its receivables for trust schemes and asset management
plans, or so-called shadow loans, by 14 percent in the first six
months of the year to 1.27 trillion yuan ($190 billion), giving
it China's biggest portfolio of such products.
The shadow loan book at China's largest joint-stock lender,
Industrial Bank Co, rose 4.4 percent to 1.23
trillion yuan, equivalent to 63 percent of its normal loan book,
according to Reuters calculations.
China Minsheng Banking Corp, China Zheshang Bank
Co, Shengjing Bank Co, Bank of Jinzhou Co
and Bank of Chongqing Co also substantially
increased their portfolios by 9 percent or more.
Minsheng and Zheshang both reported an 86 percent rise, the
fastest among their listed peers, according to Reuters
"I'm actually a bit surprised that some smaller banks were
still growing those positions," said Wei Hou, AB Bernstein
banking analyst. Given the regulatory push, the trend ought to
be going the other way, he added.
The China Banking Regulatory Commission (CBRC) didn't
immediately respond to a request for comment.
The CBRC has tried to address the rampant growth of these
shadow lending products, particularly at mid-sized banks.
In April it issued Document 82 to lenders, which most
bankers and analysts interpreted as an attempt to compel banks
to increase provisioning on shadow loans and bring them in line
with normal loans.
Some analysts at the time said the move could force banks to
seek fresh capital to shore up their balance sheets, a prospect
that has become more likely as banks' capital positions
deteriorated during the first half.
Shadow loans had already reached 12.6 trillion yuan at the
end of last year, according to calculations by UBS, about a
fifth of China's entire annual economic output.
And credit rating agency Fitch said in July that around a
third of system credit resides outside bank loan books,
undermining asset quality data.
That is particularly worrying since Chinese banks'
non-performing loans are already at a record high, according to
official figures, and most analysts think the real figures are
several times worse.
The accounting treatment of these loan-like trust and asset
management plans is significantly different.
"These shadow loans are not subjected to the same rules as
the loan book, despite being largely credit in nature," said UBS
Securities analyst Jason Bedford.
"As a result, normal limitations in the loan books, such as
single-borrower exposure limits and non-performing loan
recognition rules, don't apply."
Though the impact of the CBRC intervention is not evident in
most of the listed banks' first-half filings, there are some
China Merchants Bank Co was one of the
rare lenders to scale down its shadow loans in the first half,
with a 23 percent decrease in receivables from trust schemes and
asset management plans to 528.7 billion yuan, according to
The bank's deputy president, Li Hao, who acknowledged that
"to some degree, the bank's non-standard investments are loans",
indicated a change of approach was taking hold at the bank.
"For the future, the bank's practice will be more
standardised when it comes to new investments," Li said. "They
will no longer be put under the category of non-standard
investments, but will be classified as loans," he told analysts
on a post-results conference call.
Hou from AB Bernstein said he expected that mid-tier and
smaller banks would scale down their investment receivable
positions in the second-half of the year, else the regulator
would come out with "more targeted policies".
But, he added, while stronger banks can cut their risks or
increase provisions for their shadow loan holdings, it was more
problematic for the weaker lenders.
"For banks facing big operational pressure, increasing
provisions or bringing those high-risk investments back on their
loan book would hit an already weak bottom line."
($1 = 6.6779 Chinese yuan renminbi)
(Reporting By Shu Zhang and Matthew Miller; Editing by Will