China’s off-balance sheet lending explosion

Last week’s People’s Bank of China Financial Stability report contained a few statistics that look unbelievable.  I noted few months ago that the size of banking assets for Chinese banks has reached RMB113.3 trillion, which was 239.7% of 2011 nominal GDP.  That is a staggeringly large number compared to the West, but as credit markets are less developed in China, the discrepancy can be rationalised.

The really shocking number from the Financial Stability Report is that the size of banks’ off-balance sheet activities, which have grown to a staggeringly large number.  By the end of 2011, the size of off-balance assets has reached RMB39.16 trillion, or 35.1% of total assets according to the PBOC’s financial stability report, an increased of 17.98% from a year ago.  The off-balance sheet business experienced rapid growth when the PBOC was tightening credit.  As credit from formal channels was tightened, banks appeared to have designed ways to circumvent regulations and lend via off-balance sheet vehicles.  Entrusted loans, for instance, increased by 29.38%.  Meanwhile, the outstanding wealth management products have reached RMB4 trillion.

I am shocked by this number, which looks unreal (I was hoping it was a misprint and it was actually RMB3.916 trillion instead).  The size of off-balance banking assets amounted to 83% of nominal GDP of 2011 on top of the banking assets (presumably on balance sheet) of roughly 239.7% of GDP.  We believe that this bit of the banks’ businesses are related to the shadow banking system, which we know very little about, and this number raises far more questions than answers regarding to the scale of the shadow banking mess as well as the true scale of debts in China.

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Comments

  1. From my reading about Asian lives and culture I have become aware of a 3 tier of debt/lending that may cause ripples in the China financial pond.

    Lending clubs operated by mums and grandmas.

    Any slowing of the economy that impact on this ‘informal’ borrowing will have instant and enormous social consequences.

    My guess is that in the bush it would be a fairly common financing activity.

    • “In the Bush” – had to re-read it a few times, brilliant colloquialism which sums things up nicely.

      Am going to use it for anything which is done differently or off-piste from now on.

  2. Great article Zarasuthra – I feel that Macrobusiness unrelenting focus on this issue will be well rewarded as this is going to be ground zero if China was to have a hard landing – much like the credit defaults and collateralised debt obligations in the US.

    AS I have been repeatedly saying – if open transparent western markets are mired in corruption and surreptitious obfuscated dealings, then what of a secretive communist autocratic market ?

    Chinese miracle indeed – more like a Chinese finger puzzle.

    http://stacienaczelnik.hubpages.com/hub/Chinese-Finger-Trap