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Fitch - Growth of Leverage in China Still Outpacing GDP Growth_2011

Fitch - Growth of Leverage in China Still Outpacing GDP Growth_2011

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 www.fitchratings.com 13July2011
ChinaSpecial Report
Chinese Banks
Growth of Leverage Still Outpacing GDP Growth
Two years after the peak of the 2009 lending boom, credit levels in China remainelevated. Although bank lending has slowed, this moderation is being offset by aburgeoning of new credit channels both within and outside the banking system.Consequently, growth of leverage continues to outpace growth of the economy.In 2010, Fitch Ratings published reports on two key sources of credit leakage — theinformal securitisation of loans and the surge in undiscounted acceptances — andcalled for a broader view when assessing credit trends in mainland China. Sincethen, the authorities have introduced a new measure, total societal financing (TSF),which is an important step in this direction. However, the TSF still omits a numberof items, and hence does not fully capture total formal and shadow financing.Fitch has developed an adjusted TSF incorporating critical items currently omittedfrom the official gauge. The agency’s measure shows that China’s post‐crisis creditboom — often portrayed as a brief, isolated event in H109 — actually lasted twosolid years, and is still running quite strong. With credit still so loose, it is difficultto foresee inflation moving off the policy agenda any time soon, and any prematureeasing could risk a quicker‐than‐expected re‐acceleration of price increases.
Fitch’s adjusted TSF shows that total financing is expected to exceed CNY18trnin 2011, or 38% of GDP, CNY3.5trn above the agency’s year‐end estimate for theofficial TSF and more than double its CNY8trn estimate for new loans (Figure 1).
The main components of this uncaptured financing include letters of credit(LoCs), credit from domestic trust companies, lending by other domestic non‐bank financial institutions (NBFIs) and loans from Hong Kong banks. All of theseare on pace to reach CNY700bn‐1trn in 2011.
By end‐2011, total financing/GDP could reach 185%, up 61pp from 2007.Increases of similar magnitude have been seen elsewhere in the years leadingup to banking stress, underscoring the agency’s cautious outlook on the sector.
That China’s economy is slowing while financing is still so abundant illustrateshow dependent growth remains on loose financing (Figure 2). This is furtherhighlighted by the continued low incremental economic return on new credit.Pre‐crisis, a CNY1 increase in financing yielded roughly CNY0.75 in new GDP,but in 2009 this plummeted to CNY0.18. The economic return on credit is slowlyrising, but still has yet to fully recover.
Figure 1 Figure 2
09182736452006 2007 2008 2009 2010 2011e Q111Fitch additional credit financingTSF capital market financingTSF other credit financingTSF loans
Fitch‐Adjusted TSF
(% of GDP)Source: PBOCCNY3.5trn+06,00012,00018,0002006 2007 2008 2009 2010 2011Fitch‐adjusted TSF net new financingTSF net new financingChange in nominal GDP
Trends in Financing & GDP
(CNYbn)Source: PBOCFinancing/GDP0.76 0.78 0.70 0.18 0.34 0.42
Charlene Chu+8610 8517 2112charlene.chu@fitchratings.comChunling Wen+8610 8517 2105chunling.wen@fitchratings.comHiddy He+8610 8517 2135hiddy.he@fitchratings.comJonathan Cornish+852 2263 9901jonathan.cornish@fitchratings.com
Related Research
Applicable Criteria
Global Financial Institutions Rating Criteria(August 2010)
 Other Research
Fitch Affirms China's Ratings, Revises LocalCurrency Outlook to Negative (April 2011)
Fitch Affirms China's State Banks, But SeesSector Risks Rising (April 2011)
China (April 2011)
Chinese Banks: No Pause in Credit Growth,Still on Pace with 2009 (December 2010)
The Impact of a China Slowdown on GlobalCredit Quality (November 2010)
Macro‐Prudential Risk Monitor (June 2010)
China: Stimulus Hangover? (October 2010)
Chinese Banks: Informal SecuritisationIncreasingly Distorting Credit Data(July 2010)
Chinese BanksJuly 2011
2Behind theOfficialTSF
The People’s Bank of China’s (PBOC; the central bank) TSF consists of sevenprimary components: bank loans, undiscounted acceptances, tri‐party entrustedlending, a small portion of trust company lending, domestic corporate bond andequity fundraising, insurance company investment in real estate, and insurancepolicy payouts to households and corporates. Also included is a small “other”category, which largely consists of lending by micro‐lenders (which are excludedfrom system‐wide loan figures) and private equity. Below are details on the mostcomplex items.
Bankers’Acceptance Bills
Bankers’ acceptance bills refer to undiscounted acceptances, or the gap betweenthe banking system’s off‐balance‐sheet acceptances and on‐balance‐sheetdiscounted bills. When a Chinese bank discounts an acceptance, the moneyextended is considered a form of lending and should be recorded in its loanportfolio. However, as Fitch observed last year, Chinese banks began heavilyoffloading discounted bills in 2010, which has the effect of masking their true creditgrowth and credit exposure. As a result, the gap between acceptances and bills hassoared. This gap is expected to exceed CNY5trn outstanding by end‐June 2011,equivalent to more than an entire year of new bank loans before the global crisis(Figure 3).
Entrusted Loans
Entrusted loans represent tri‐party loans in which entities not legally permitted toextend loans (e.g., corporates) do so by entrusting the money to a bank or financecompany, which then on‐lends the money to the designated borrower. Banks actmerely as transfer agents in such transactions, and take on no direct credit risk.
Trust Loans
Trust loans refer to credit extended through a specific type of trust product createdjointly with banks and whose underlying assets consist solely of loans. Issuance ofthese products has plummeted amid stricter regulation. However, many marketparticipants have incorrectly extrapolated this to mean that all trust activity haswaned, when in fact issuance of other trust products remains robust (see
CreditFrom Domestic Trust Companies
Figure 4
03,0006,0009,00012,00015,0002005 2006 2007 2008 2009 2010 Q110 Q1110918273645Loans (LHS) Undiscounted acceptances (LHS)Entrusted loans (LHS) Trust loans (LHS)Insurance, bonds, equity, other (LHS) TSF (RHS)
Total Societal Financing
(CNYbn)Source: PBOC(% of GDP)
Introducing theFitch­Adjusted TSF
The creation of the TSF represents an important step forward by the Chineseauthorities in broadening their conceptualisation of financing beyond lending, andprovides data on several activities that previously had been unavailable at thesystem level. However, a number of important items remain excluded, making theTSF too narrow to be used as a solid gauge of total formal and shadow credit.
Figure 3
Accep‐tances BillsRedis‐countedbills
 2004 1,500 1,000 3 4972005 1,960 1,380 0 5802006 2,210 1,720 2 4882007 2,440 1,280 6 1,1542008 3,200 1,900 0 1,3002009 4,100 2,385 18 1,6972010 5,600 1,500 79 4,021Q111 5,900 1,200 77 4,623
Includes commercial acceptances, whileTSF only includes bankers’ acceptances.As a result, the change in this gap differsslightly from that reported in TSF
Rediscounted by the central bankSource: PBOC

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