From The Peterson Institute...:
Shadow banks in China come in
a variety of forms and guises. The term is applied to everything from
trust companies and wealth management products to pawnshops and
underground lenders. What surprising is that China’s biggest shadow bank
is actually a creation of the central government and receives billions
in financing directly from the banks. Even more interesting, this
shadow bank recently pulled off a successful international IPO where it
raised billions of dollars.
First, let’s deal with the terminology. The “shadow” in shadow
banking doesn’t imply nefarious doings, although it frequently involves a
bit of regulatory arbitrage. At the most basic level, shadow banking is
borrowing funds and extending credit outside of normal banking
structures.
So what is this mysterious shadow bank that has such tight government
connections? It’s none other than Cinda Asset Management Company, a
creation of the Ministry of Finance (MoF) and the beneficiary of a
recent 2.5 billion U.S. dollar IPO in Hong Kong. In terms of total
assets, Cinda is more than 15 times as large as any of the country’s
trust companies.
The normal business of a distressed asset management company (AMC) is
not shadow banking. It involves purchasing troubled loans at a discount
and trying to collect a higher amount from the debtors. Cinda was one
of the four AMC’s created by the central government to bailout the
banking sector in the 1990s. The initial round of bad debt purchasing
was policy-directed, starting in the late 1990s and lasting through the
mid-2000s. In the second half of the 2000s, the big four AMCs began to
purchase NPLs from banks on commercial terms and in the process tried to
transform themselves into market-oriented businesses.
Over the last three and a half years, Cinda’s business has diverged
from this model. In addition to purchasing bad debts from banks and
other financial institutions, it has accumulated a vast stock of
distressed debt assets directly from non-financial corporations.
These non-financial enterprises distressed assets (NFEs) include
overdue receivables, receivables expected to be overdue, and receivables
from corporates with liquidity issues. In effect, Cinda has become a
huge source of financing for companies facing financial distress.
It comes as no surprise that real estate developers have been the
primary recipient of this emergency funding. Squeezed by central
government efforts to dampen the housing boom, real estate developers
are frequently cut off from formal bank loans. As is the case with the
growth of shadow banking in other parts of the financial system, Cinda
has found a way to circumvent these restrictions by offering credit to
property developers through the NFE channel. The Cinda IPO prospectus
states that 60 percent of distressed receivables are attributable to the
real estate sector.
What makes the whole situation a bit dubious is that Cinda has
financed these purchases through a massive borrowing spree at below
market rates. Over the last 3.5 years, the size of CINDA’s borrowings
increased 13x, while the interest on these borrowings has fallen
dramatically (paid interest was less than three percent). Despite the
claim from the IPO prospectus that the borrowing was primarily from
“market-oriented sources,” it seems unlikely that any market-oriented
actor would loan out funds at a rate significantly below inflation and
less than half of the benchmark lending rate....MORE
HT: The FT's beyondbrics'
Further Reading post.
