* New loans surge in first quarter even as economy shrinks
* Move coincides with drop in interbank exposure
* Investors shift from trusts back to banks
By Lianting Tu
SINGAPORE, May 1 (IFR) - Chinese banks are cleaning up their
act, according to analysts in China, who say that a recent surge
in new loans is more a reflection of lenders bringing assets on
to their balance sheets than necessarily new debt.
New loans in the first quarter totalled Rmb3.01trn
(US$482.3bn), a 9.6% rise over the same period last year and the
highest number since the first quarter of 2009, when new loans
amounted to Rmb4.58trn, according to data from the People's Bank
of China compiled by Thomson Reuters.
Banking analysts, however, are saying that a good chunk of
the new lending is actually a result of a reduction of interbank
assets in anticipation of tighter regulation. Many of those
interbank assets are essentially loans to corporate borrowers
via trusts or other arrangements.
"There has been a rumour that the [China Banking Regulatory
Commission] will soon release new rules to regulate banks'
interbank business. Some banks have been reducing exposure to
interbank lending and borrowing - such as Xiamen Bank - in
anticipation of the new regulations," said Qiang Liao, a
Beijing-based banking analyst for S&P.
A recent report by Deutsche Bank pointed out that banks
reduced their interbank assets by 1.5% in 2013 to Rmb1.7trn, or
an average of 10.4% of total assets. Analysts suggest that the
move continued and possibly even quickened in the first quarter.
Interbank lending had experienced significant growth over
the past few years as a way for banks to circumvent the
loan-to-deposit ceiling and to set aside less capital for their
loan books. In order to record a loan as interbank assets, banks
typically route corporate loans through other banks and thus
register the debt as credit exposure through the interbank
market, which is not constrained by loan-to-deposit ratios.
Xiamen Bank's interbank assets dropped by about 50% in the
second half of last year compared to the first half. Other
mid-tier banks such as China Minsheng Banking Corp and
Industrial Bank - which have much higher exposure to interbank
lending than big banks - also scaled back interbank assets in
2013, respectively by 8.9% and 6.9% versus total assets.
One common way to convert interbank lending back into
regular loans is to have the counterparty bank return the funds
issued by the original lending bank. Then, the lender
reclassifies the lending as a direct corporate loan.
The theory finds further support in the fact that the surge
in new loans has not been accompanied by a pick-up in growth, as
was the case in 2009.
Analysts suggested that the recent slowdown in trust lending
may also be part of the same movement. Growth in credit issued
by the shadow banking system in 2013 dropped to 32.2%, from
36.8% in 2012 and 49% in 2011, according to the Deutsche Bank.
The deceleration is mainly due to slower growth in trust
assets, which account for about 60% of the shadow credit,
totalling around Rmb19.6trn as of end-2013.
Data released by China Trust Association last week showed
that growth in trust assets slowed to 7.5% in the first quarter
of this year compared to the last quarter of 2013. The slowdown
began in the second quarter of 2013, with quarterly growth rates
at 7%-8.3% compared to an average of 11.8% in previous three
Part of the move from trust lending to direct bank lending,
however, is also the result of a shift in investor sentiment.
"The slowing Chinese economy translates to lower demand for
trust financing and investors also have less appetite for
high-risk investments," said Simon Gleave, regional head of
financial services at KPMG.
Gleave suggested investors have started demanding more
options from their banks instead of third-party wealth managers
or trusts. Such a move would make lending directly from the
balance sheet easier for banks.
However, even with more investors putting their money in the
banks, bringing the loans back to the books could push some
institutions to quickly run into the 75% loan-to-deposit ratio
cap set by the China Banking Regulatory Commission. If that were
to happen, the sudden surge in new loans could quickly turn a
Yet, a sharp deceleration may not come any time soon.
"The Chinese economy is still growing and the regulators are
careful to make sure the new rules are not so tough as to hurt
economic growth," a Hong Kong-based analyst said.
(Reporting By Lianting Tu; editing by Christopher Langner,