China’s Credit Binge Has Driven Its Banks to Hide $2 Trillion in Loans

General Views of Caofeidian Industrial Zone

From Fortune:

“China’s banks are masking loans as investments through an accounting trick to the tune of $2 trillion, or about 20% of their existing loan portfolio, according to a Wall Street Journal tally.

With China’s latest economic growth recently being driven by unprecedented levels of debt, that debt is gaining increased attention. Two years ago the focus turned to shadow banking, the non-bank financing that included runaway wealth management products and trust loans. Now it is shadow banking of another kind.

Off-balance sheet vehicles and a hodge-podge of bank and non-bank lending are behind the current rise. It is this “plumbing” that makes China risky for a crisis if liquidity dries up following a property slowdown or other triggering event, according to Emerging Advisors Group.

The two trillion dollars worth in lending, miscounted as investments, is a symptom of the plumbing problem. The investment categorization means the banks aren’t holding capital against potential losses. Many of the loans are made to property developers. If China’s rising property market stalls or reverses, those loans could quickly overwhelm their lenders. It would then be up to the government to decide whether to bail them out. A similar contagion afflicted Western banks during the 2008-2009 financial crisis.”

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