Home' Trinidad and Tobago Guardian : July 5th 2015 Contents SBG14 FINANCE
SUNDAY USINESS GUARDIAN www.guardian.co.tt JULY 5 • 2015
China s vast network of
"gray market" lenders
have reaped big profits
from lending money to
individuals and compa-
nies to buy stocks, but as
markets slump their cus-
tomers face heavy losses
after borrowing up to 10 times their starting
Global investors are increasingly worried
about the scale of leverage in China s stock
market, fearing the impact of a crash on the
ordinary retail investors who dominate it could
destabilise the world s second biggest economy
just as growth is slowing.
The risks have been magnified by the gray
or shadow market: a network of state-owned
commercial banks, trust companies, fund man-
agers, and loosely regulated grassroots finance
This financing, which can carry annualised
interest rates of up to 17 per cent, was the
financial rocket fuel that powered a 110 per
cent gain in Shanghai stocks between Novem-
ber and early June, by allowing borrowers to
substantially leverage their capital.
These firms continue to benefit from interest
payments and fees, even as more than US$2.5
trillion has been wiped from China s market
capitalisation over the last four weeks.
Excessive leverage can be lethal in stock
markets, because as overextended borrowers
sell shares to meet "margin calls" they drive
prices down further, creating a vicious cycle.
Light regulation of shadow lending under-
scores Beijing s quandary as it looks to both
protect the army of mom and pop investors,
who comprise 80 per cent of the stock market,
while supporting a rally that has helped raise
more than US$63 billion from primary and
secondary equity sales in China and Hong
Kong this year alone.
"This needs to be controlled," said Jiahe
Chen, chief strategist at Cinda Securities,
adding that when markets were falling high
leverage could create a domino effect.
China s gray financing network involves a
loose association of commercial banks, includ-
ing the largest five state-owned lenders, smaller
commercial banks, trust companies and an
endless variety of self-styled stock matching
These finance firms, many of which were
founded in the last year, often have backing
from government enterprises but operate out-
side the remit of China s securities or banking
Calculating the size of the market is tricky,
bankers say, due to its loose regulation. Total
margin debt at brokerages stood at 2.2 trillion
yuan in late June, but the amount of gray mar-
ket leverage may exceed that amount.
For China s trust companies alone, stock
assets increased by 225 billion yuan (US$36
billion) from the previous quarter in the first
three months this year, reaching 777 billion
yuan by March 31, according to China Trust
That helped drive a 33 per cent year-on-
year gain in total profit for China s 68 trust
firms in the first quarter of 2015.
Typically, banks cooperate with trust firms
and stock matching endowment companies
to raise cash by issuing wealth management
products (WMPs) that are sold to banking
These products generate funds that are then
used to finance individual and corporate stock
market investors at ratios of up to 1:10, accord-
ing to executives familiar with the business-
es.The arrangement highlights a persistent
faultline running through China s financial
system, despite Beijing s efforts to regulate the
shadow system - people buying WMPs through
mainstream banks may be, knowingly or not,
left highly exposed to the vagaries of the stock
Trust companies have also used such prod-
ucts to back real estate loans, corporate junk
bonds and short-term over-the-counter debt
"Riskier clients go to trust companies
because they can t get loans from banks," said
Edmond Law, banks analyst at UOB Kay Hian
(Hong Kong) Ltd, adding that investors in trust
products backed by lending to these clients
were at higher risk.
Good money for nothing
The financing firms limit their own risk by
requiring investors to add cash or sell shares
once their accounts lose anywhere from 50 to
70 per cent of their original investment value,
Two large and two smaller trust firms told
Reuters that large state-owned banks such as
Bank of China Ltd (BoC) and Bank of Com-
munications Co (BoCom) Ltd as well many
smaller lenders, indirectly channel money into
the stock market this way.
"Banks are making good money for nothing,"
said an executive at a Shenzhen-based stock-
matching endowment firm. His firm, a sub-
sidiary of a central-government owned state
enterprise, raises funds by selling WMPs
through Bank of China.
It works like this: BoC raises 40 million
yuan by selling the WMP to its clients, after
a stock matching firm provides 20 million
yuan in collateral. That creates a 60 million
yuan pool that the stock matching firm can
use to sell leverage to its customers.
BoC charges 10 per cent annualised interest
for such products, allowing the stock matching
firm the opportunity to earn as much as 5 per
cent, based on the 15 per cent annualised inter-
est it charges clients.
Using trust firms as conduits, banks also
invest money in funds that pile capital directly
into stock markets, according to banking exec-
utives familiar with the situation.
BoC and BoCom declined to comment when
contacted by Reuters.
A mid-level banker with one of the top five
state-owned banks said that lending to trust
companies involved very little risk to lenders
themselves, as agreements were structured so
banks are paid first if the markets tank.
"There are things that banks can t do directly
because of risk to asset quality or reputation,"
he said. "So we use trusts as channels."
China's 'shadow lenders' line
pockets even as bourses bomb
Links Archive July 4th 2015 July 6th 2015 Navigation Previous Page Next Page