【New York Times】Shadow Lending Threatens China’s Economy, Officials Warn

Shanghai’s financial district of Pudong. Chinese financial officials warned on Saturday about the dangers of shadow banking. Credit Aly Song/Reuters

BEIJING — The chairman of China’s biggest bank and a senior Chinese insurance regulator issued strong warnings on Saturday about the dangers of shadow banking to the Chinese economy, in the latest signs of growing top-level concern here about a rise in highly speculative, poorly regulated lending.

Shadow banking, or lending that takes place outside official banking channels, plays a major role in the Chinese economy, where big government-controlled banks are often slow to lend to private businesses and entrepreneurs. But experts worry that untrammeled shadow lending could lead to ticking time bombs that could threaten the financial system of the world’s second-largest economy.

Yi Huiman, the chairman of the Industrial and Commercial Bank of China, which is the world’s largest bank as measured by assets, warned about the rapid spread of unregulated investment vehicles, such as wealth management products. Wealth management products are often sold by banks and other Chinese financial institutions to ordinary Chinese investors with the promise of interest rates much higher than what banks offer for deposits, but the obligations are often kept off bank balance sheets.

Shadow banking “is not subject to full regulation, or any regulation at all,” Mr. Yi said. “We have to focus. If not, the real economy will suffer.”

Chen Wenhui, the vice chairman of the China Insurance Regulatory Commission, said Chinese regulators were particularly trying to understand the swift expansion of internet lending platforms that are raising huge sums of money from the general public. Many of these lending platforms, which offer big returns and accept minimum contributions low enough to entice common workers, have disclosed fairly little about how they will invest the money they raise.

The general public appears to be pouring large sums into new investment vehicles despite receiving scant disclosure, Mr. Chen said.

“They just buy the investments,” he added, “They have no idea what the product is.”

Mr. Yi and Mr. Chen spoke at a panel on Chinese finance at the China Development Forum, an annual, three-day gathering that started here on Saturday and has mustered a long list of the world’s most famous economists in addition to many top Chinese government and business leaders.

Credit has been expanding swiftly in the Chinese economy, as the government has resorted to heavy stimulus to prevent the economy from slowing further. The Chinese economy expanded 6.7 percent last year. But to achieve that, Chinese financial regulators allowed total outstanding credit to expand by the equivalent of about 15 percent of the economy’s annual output.

Part of that borrowing went to pay for heavy investments in new infrastructure, like high-speed rail lines, and new factories for state-owned enterprises.

But much of the lending appears to represent a speculative frenzy, often involving residential real estate, that has become of increasing concern to some Chinese officials, bankers and economists. Real estate prices in large and medium-size cities climbed 12 percent in the 12 months that ended in February, the National Bureau of Statistics said this week.

Some kinds of shadow banking have seen spectacular growth, like entrusted loans. Entrusted loans are loans from one company to another, usually done through a bank to get around a ban on Chinese companies lending directly to each other. These loans — which are also kept off the books of banks — jumped 20 percent in the 12 months through the end of January, and now account for 9 percent of overall credit in China, according to a report last month from Natixis, a French-owned financial services firm.

China’s leaders insist that they understand the risks and contend that they will be able to control them. They say measures such as government and household debt as a percentage of economic output are not alarming by international standards, nor have bad loans as a percentage of overall bank loans reached a worrying level.

“We are fully aware of potential risks and will take prompt and targeted action,” Premier Li Keqiang said at his annual news conference on Wednesday.

But as Mr. Yi’s and Mr. Chen’s comments underlined on Saturday, worries in China are focusing on how Chinese financial institutions raise the money that they lend — and what could happen if investors suddenly demand much of that money back.

Mr. Yi’s remarks to some extent represented an unusually blunt criticism of his bank’s smaller competitors. I.C.B.C. is one of the so-called Big Four state-controlled banks that make up nearly half the country’s banking system. Each of the four — the others are the China Construction Bank, the Bank of China and the Agricultural Bank of China — has thousands of branches to collect deposits, a stable source of financing, although the banks also sell some wealth management products.

Lacking that big deposit base, many smaller banks rely more heavily on the sale of wealth management products. Because banks usually keep those obligations off their books, they have greater flexibility to lend to more speculative projects and use the proceeds to pay higher interest to investors — provided that the more speculative borrowers repay their loans.

Mr. Yi took aim at all risky forms of borrowing on Saturday. “If we do not deal correctly with shadow banking, the risks could be huge,” he said, adding that the result had been “higher leverage, too many derivatives and too many products with no transparency.”