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Monday, July 25, 2016, 12:22

Vanke battle puts focus on risky lending

By Reuters

HONG KONG - The takeover tussle embroiling top Chinese developer China Vanke has unveiled how local banks are increasingly exposed to highly volatile domestic stock markets through risky shadow lending products that mask their worsening asset quality.

In their hunt for higher investment returns in a slowing economy and to offset the impact of rising bad loans, Chinese banks are putting their depositors' money into so-called asset management plans (AMPs), products set up for the purpose of lending to companies and backed by shares as collateral.

Baoneng Group, which is attempting a hostile takeover of Vanke, used 26 billion yuan (US$3.9 billion) of such instruments from about half a dozen banks - including traditionally cautious China Construction Bank Corp (CCB) - to partly finance buying 25 percent of the property developer.

CCB declined to comment.

While there is no official data on banks' overall exposure to shares through shadow lending channels, JPMorgan estimated that AMP funds stood at 32 trillion yuan at the end of March, double a year earlier.

Although not illegal, banks growing use of such shadow-lending techniques, which often make use of opaque instruments known in China as wealth management products (WMPs), could be sacrificing proper risk management in the pursuit of profit.

"The whole nature of WMPs and AMPs is that it's a murky area. There is a degree of regulatory arbitrage there and it's clearly a way for (the banks) to get around the prudential rules," said Jack Yuan, associate director at Fitch Ratings.

"It's concerning that the scale of this sort of activity is widening, and there is no effective regulation around this."

In almost all cases, shadow lending is kept off the banks' balance sheets, making it difficult to gauge the true extent of the banks' exposure to this form of fund raising or lending - which is of particular concern as Chinese commercial banks' loan defaults are at their highest since the global financial crisis in 2009.

More broadly, debt levels in the country are mounting, with the overall level of private, corporate and government debt reaching 250 percent of the country's economic output last year.

People familiar with the matter said the banks involved in the Baoneng AMPs have been promised a return of as high as 7.5 percent, compared with China's 10-year treasury bond yield of 2.8 percent.

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