Hong Kong's stock market is shining a new light on the dark arts of Chinese finance. The country's mid-sized lenders have become skilled at repackaging loans to look like lower-risk investments. Two impending share offerings from state-backed banks underscore how such wizardry has fueled growth.
In recent years mid-sized Chinese banks have devoted an increasing proportion of their balance sheets to various investment products, often issued by other financial institutions. These vehicles, known as trust plans, asset management plans or wealth management products, tend to be backed by loans or bonds, though it's often hard to tell exactly where the money has ended up.
What's clear, however, is that Chinese banks find this business more attractive than regular lending. This may be because it requires them to hold less capital than for corporate loans, and also carry fewer provisions for possible bad debts. To see how important this business has become, just look at China Zheshang Bank, which is based in Hangzhou, the home town of e-commerce giant Alibaba. It is currently completing a $1.75 billion initial public offering in Hong Kong. At the end of 2013, Zheshang had less than $3 billion of debt instruments, such as wealth management products, on its balance sheet. By the end of last year this had exploded to $66 billion - 42 percent of its total assets. Income and fees from these activities - which the bank calls "Treasury Business" - brought in a staggering 80 percent of pre-tax profit last year.
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