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Monday, July 5, 2010

China Cracks Down on Loan Repackaging

The Wall Street Journal

Has China learned a lesson we still haven't?

BEIJING—China's banking regulator ordered trust companies to halt cooperation with banks, an official at a trust firm said on Monday, in an apparent move to crack down on a practice by banks to move some loans off their balance sheets to avoid strict regulatory controls.

The order on Friday came after the China Banking Regulatory Commission warned on June 1 about the growing volume of wealth-management products that repackaged bank loans, an official at a bank's wealth management department said. The official said trust clients informed him of the halt on Friday after they received phone calls from the CBRC.

No written document was issued regarding the halt, the official said. A CBRC spokesman wasn't immediately available for comment.

CBRC often issues oral guidance to regulate lending. When the trusts hold the loans, the banks typically don't count them on their books.

The CBRC has lowered this year's target for new yuan-denominated loans to 7.5 trillion yuan ($1.108 trillion) from 9.59 trillion yuan issued last year, on concerns that default risks have continued to rise after a lending spree last year spurred by a massive government-directed stimulus program.

However, many banks still want to lend, as they are keen to boost profitability and gain market share.

The trust companies occupy an unusual niche in China's financial sector. Less tightly regulated than other institutions, they operate more like hedge funds. The trusts typically raise funds from corporate investors and wealthy individuals and invest the money in activities like leasing, real-estate purchases and private-equity investments.

The volume of outstanding loans packaged into trust products reached 2.5 trillion yuan ($369.19 billion) in the first half of this year, equivalent to the full-year size recorded last year, according to Tang Liqiong, an analyst with research company Shanghai Benefit Investment Consulting.

Such a large volume increases the risks in the banking system and complicates the regulator's effectiveness in restricting lending as part of the government's macroeconomic policy, she said.

Ms. Tang added that the duration of the halt on such trust loans will depend on China's economic situation and how the regulator adjusts its lending policy.