How Chinese Banks Reduce Lending While Expanding Credit and the Hidden 2 Trillion RMB in Liquidity: A Case Study on the Bank of Chongqing and Huishang Bank

22 Pages Posted: 16 Apr 2014 Last revised: 24 Apr 2015

See all articles by Christopher Balding

Christopher Balding

Fulbright University Vietnam

David Garcia

Peking University

Date Written: April 15, 2014

Abstract

Chinese banks have sought ways to rapidly expand lending in light of strict regulatory mandates to reduce official lending and maintain high capital adequacy ratios. Through arbitraging capital risk weights, total lending has expanded while capital adequacy ratios have remained unchanged. Off-balance sheet transactions using lower credit quality assets to collateralize repurchases remain a channel for banks to increase their balance sheet and reduce official lending. Many banks even classify repurchase lending underneath the heading of lending to banks. As back door lending funds roll-overs and commodity speculation, banks’ inherent liquidity risk exposure causes investors to significantly underestimate systematic risk. Huishang Bank’s expansion of arbitraged credit lines into high risk areas has forced the bank to increase Treasury assets 100 billion rmb in 18 months for a net profit increase of 16 million rmb or a marginal return on net assets of 0.015% — in essence — zero.

Keywords: China, banking, shadow banking, asset quality, risk weighting

JEL Classification: G11, G18, G21, G23, G28

Suggested Citation

Balding, Christopher and Garcia, David, How Chinese Banks Reduce Lending While Expanding Credit and the Hidden 2 Trillion RMB in Liquidity: A Case Study on the Bank of Chongqing and Huishang Bank (April 15, 2014). Available at SSRN: https://ssrn.com/abstract=2425097 or http://dx.doi.org/10.2139/ssrn.2425097

Christopher Balding (Contact Author)

Fulbright University Vietnam ( email )

Vietnam

David Garcia

Peking University ( email )

University Town
Nanshan District
Shenzhen, Guangdong 518055
China

HOME PAGE: http://english.phbs.pku.edu.cn/

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