China: Trying to rein in shadow-banking - Rabobank

Chinese regulators are to introduce their own equivalent of the US Dodd-Frank act to try to rein in shadow-banking: the proposed legislation will stop banks selling high-yielding Wealth Management Products (WMPs) to anyone except “qualified” investors, which in this case would mean having CNY5m (USD750,000) in family financial assets, or earnings above CNY400,000 for three consecutive years, explains the research team at Rabobank.

Key Quotes

“Meanwhile, there will no longer be any promises on returns, and banks will have to set aside 10% of their management feeds as “risk reserves”. None of this is due to kick in until June 2019, apparently, but it’s radical stuff.”

“The problems are: (i), without WMPs, how are bank going to fund themselves as they struggle to find enough deposits to fuel the rapid loan growth they are forced to target? (ii) How are households going to cope without that interest income – what bubble do they blow next in response? And (iii) How do we avoid the WMP pyramidscheme collapsing when liquidity inflows dry up? “Mr. Minsky, please meet Mr. Moment.”

“China is also going to crack down on local governments abusing Public-Private Partnerships to ”prevent the PPP program from being abused and turned into a new type of (government) financing vehicle, and to firmly contain the risks of an increase in hidden debt”– that measure starts from March 2018. It’s also being reported that the frenetic investment in subways is also going to slow, with not all planned to be built. Now, you put all that together and it really does sound like the deleveraging that we have yet to see. How will the Chinese economy cope with less local government borrowing, and less WMPs, and less state investment all at once, if so?”