More moves to slow credit in China

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From Reuters today:

Chinese banks must create a firewall around increasingly popular wealth management services, the country’s banking regulator urged, in order to avoid any contagion from higher risk products spreading to normal bank loans.

Banks must establish a separate department to carry out wealth management business by the end of September, the China Banking Regulatory Commission (CBRC) said on its website on Friday.

Thirsting for higher returns, China’s wealth management sector has exploded in recent years, hitting around 12.8 trillion yuan ($2.06 trillion) by the end of May. But the opaque nature of the sector has fed concerns about its health.

New rules require banks to set up separate departments for risk management, accounting and statistical analysis for wealth management services, and give details for each wealth management product individually.

Interesting stuff. China’s wealth management sector operates much more like the US’s securitisation sector. The banks act as transactors or credit not intermediaries of it. That is, they bundle and sell loans to investors rather than keep them on their own balance sheets and take fees for their trouble.

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In the US, one of the big problems with this business model proved to be the temptation for banks to profiteer at investor’s expense. Because they had no “skin in the game” they bundled garbage and sold it on for the fees. Much the same thing happened in Australia though it was nicely covered up by the massive bailout and takeover of the sector.

China appears to be aiming to address this fundamental agency problem with transparency and clearer accountability. That’s all to the good but in the end the efficacy of the measure will depend upon what is meant by “risk management”. Does that mean the banks must hold a greater proportion of the securitised assets to prevent the deterioration in lending standards inherent in the “pass though” model? If so, that also means holding capital against the assets which can only come from the parent bank.

Any way you cut it, securing securitisation slows lending.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.