Record sales of investment products
Source: Bloomberg News |
August 8, 2011, Monday
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Print Edition
Print Edition
China's banks are circumventing restrictions on loans by selling record amounts of investment products to savers at a time when deposit rates trail inflation by the most in three years.
Banks sold 8.51 trillion yuan (US$1.3 trillion) of the products in the first half by offering returns up to 2.25 percentage points higher than on savings accounts, according to Benefit Wealth, a Chengdu-based company that monitors such sales. That's 20 percent more than for 2010. As much as 50 percent of the outstanding money may go to companies, including developers and local government financing vehicles, instead of into stocks and bonds, according to Wilson Li, an analyst at Guotai Junan Securities Co, China's second-largest brokerage.
The central bank is using loan quotas and higher reserve requirements to limit credit growth as it tackles an inflation rate that hit a three-year high of 6.4 percent in June. A three-year credit boom to finance bridges, railways and infrastructure has caused off-balance sheet lending to surge and it could be as high as 25 percent of gross domestic product, according to a May 16 Bank of America Merrill Lynch report.
"It is expanding too quickly, imposing systemic risk to the banking sector," said Li in a telephone interview from Shenzhen. "Banks have shifted the credit risk from the banking sector to the people who hold such products. If the projects default the banks bear the moral responsibility to pay back the money to the households, they cannot just walk away." The outstanding amount of the products was around 3.3 trillion yuan by the end of June, Li said. CITIC Securities Co estimates 30 to 40 percent are related to financing company projects, it said in a July 18 note.
Gap widens
The gap between China's inflation rate and its one-year deposit rate was 3.15 percentage points in June, the latest month for which consumer price index data is available. The central bank raised its deposit rate by 0.25 basis point to 3.5 percent last month.
The United States and Europe are also suffering from negative real yields. Ten-year Treasuries yield 2.6 percent and similar- maturity UK debt 2.7 percent, according to data compiled by Bloomberg News. Inflation is 2.6 percent in the US and 4.2 percent in the UK, latest figures show.
So-called "wealth products" marketed by Chinese banks are short-term and invest directly in company projects as well as domestic and foreign-currency bonds and loans. More than 80 percent of those issued in the first half of the year mature within six months, according to Benefit Wealth. Many require a minimum of 50,000 yuan to invest, according to product descriptions on banks' websites.
Products with a maturity of more than one year yield an average of 5.75 percent, according to Benefit Wealth, 2.25 percent above the official one-year deposit rate of 3.5 percent.
Off-balance sheet lending by banks has "grown rapidly" spurring total credit as a share of gross domestic product to go up by 30 percentage points in the last five years, Tao Wang, head of China economic research at UBS AG, said in a note last Tuesday. This gain is alarming and "needs to stop soon and reverse in the coming few years," she wrote.
Outstanding credit in China rose to over 170 percent of gross domestic product in 2010, said a Credit Suisse AG report published on June 20. That compared with a credit-to-GDP ratio of 109 percent in India and 132 percent in Brazil, according to the report.
Banks sold 8.51 trillion yuan (US$1.3 trillion) of the products in the first half by offering returns up to 2.25 percentage points higher than on savings accounts, according to Benefit Wealth, a Chengdu-based company that monitors such sales. That's 20 percent more than for 2010. As much as 50 percent of the outstanding money may go to companies, including developers and local government financing vehicles, instead of into stocks and bonds, according to Wilson Li, an analyst at Guotai Junan Securities Co, China's second-largest brokerage.
The central bank is using loan quotas and higher reserve requirements to limit credit growth as it tackles an inflation rate that hit a three-year high of 6.4 percent in June. A three-year credit boom to finance bridges, railways and infrastructure has caused off-balance sheet lending to surge and it could be as high as 25 percent of gross domestic product, according to a May 16 Bank of America Merrill Lynch report.
"It is expanding too quickly, imposing systemic risk to the banking sector," said Li in a telephone interview from Shenzhen. "Banks have shifted the credit risk from the banking sector to the people who hold such products. If the projects default the banks bear the moral responsibility to pay back the money to the households, they cannot just walk away." The outstanding amount of the products was around 3.3 trillion yuan by the end of June, Li said. CITIC Securities Co estimates 30 to 40 percent are related to financing company projects, it said in a July 18 note.
Gap widens
The gap between China's inflation rate and its one-year deposit rate was 3.15 percentage points in June, the latest month for which consumer price index data is available. The central bank raised its deposit rate by 0.25 basis point to 3.5 percent last month.
The United States and Europe are also suffering from negative real yields. Ten-year Treasuries yield 2.6 percent and similar- maturity UK debt 2.7 percent, according to data compiled by Bloomberg News. Inflation is 2.6 percent in the US and 4.2 percent in the UK, latest figures show.
So-called "wealth products" marketed by Chinese banks are short-term and invest directly in company projects as well as domestic and foreign-currency bonds and loans. More than 80 percent of those issued in the first half of the year mature within six months, according to Benefit Wealth. Many require a minimum of 50,000 yuan to invest, according to product descriptions on banks' websites.
Products with a maturity of more than one year yield an average of 5.75 percent, according to Benefit Wealth, 2.25 percent above the official one-year deposit rate of 3.5 percent.
Off-balance sheet lending by banks has "grown rapidly" spurring total credit as a share of gross domestic product to go up by 30 percentage points in the last five years, Tao Wang, head of China economic research at UBS AG, said in a note last Tuesday. This gain is alarming and "needs to stop soon and reverse in the coming few years," she wrote.
Outstanding credit in China rose to over 170 percent of gross domestic product in 2010, said a Credit Suisse AG report published on June 20. That compared with a credit-to-GDP ratio of 109 percent in India and 132 percent in Brazil, according to the report.
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