Caixin
Jan 25, 2018 07:45 PM
FINANCE

Financial Institutions Skirt Entrusted Loan Restrictions

China’s financial asset exchanges have rushed in to offer financial institutions deals similar to entrusted loans, which regulators cracked down on earlier this month. Photo: VCG
China’s financial asset exchanges have rushed in to offer financial institutions deals similar to entrusted loans, which regulators cracked down on earlier this month. Photo: VCG

The recent crackdown on entrusted loans has tempted some of China’s financial asset exchanges to fill in the void to help financial institutions evade regulatory restrictions to lend outside the formal banking system.

The exchanges, which are over-the-counter marketplaces where a wide range of products such as nonperforming financial assets, private equity and receivable income rights are traded, have rushed to offer deals similar to entrusted loans.

Both China’s banking and securities regulator issued new rules this month to tackle China’s entrusted loan business, a key segment of the country’s shadow banking sector.

On Jan. 5, the China Banking Regulatory Commission (CBRC) stipulated that banks cannot facilitate entrusted loans that are used to invest in bonds, equities or asset management products. Banks are also barred from providing guarantees or being involved in decisions about how the loans are used. In mid-January, Caixin learned from separate sources that the China Securities Regulatory Commission ordered a ban on investing collective asset management plans into entrusted loans.

But financial asset exchanges have allowed a way around of these restrictions.

Companies can list “creditors’ rights,” or their request for credit, at financial asset exchanges, with some assets put down as pledge or collateral. This allows banks to directly purchase the rights or entrust another bank or trust company to do it, depending on the type of product the company is listing.

Listing creditors’ rights has been around for a long time, but has only become popular recently as investors seek alternatives to entrusted loans, a source from a financial asset exchange told Caixin.

These exchanges are essentially playing with fire, an employee from CCB Trust Co., which is one of the eight trust firms under the direct supervision of the CBRC, told Caixin. Other industry insiders said that regulators were sure to crack down on this activity if it becomes widespread.

Credit activities facilitated by nontraditional financial institutions such as financial asset exchanges and financial leasing companies should be incorporated into a unified set of regulations to prevent these institutions from profiting from regulatory arbitrage, said He Jin, an expert on the investment and financing committee at the Society of Public Finance of China.

Since the first financial asset exchange was set up in May 2010, the industry has grown to 52 such marketplaces as of July 6, according to data from research firm Wangdaizhijia.

Contact reporter Liu Xiao (liuxiao@caixin.com)

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