China’s $38-T Off-Balance Sheet Items Poses Little Risk

China’s $38-T Off-Balance Sheet Items Poses Little Risk

China’s $38-T Off-Balance Sheet Items Poses Little Risk


The Chinese finance sector’s RMB 253-T ($38-T) of off-balance sheet items pose little risk because more than two-thirds of them are relatively harmless components such as custodial funds and untapped credit-card limits, said UBS Group AG (NYSE:UBS).

Despite the size of the number, a financial systemic credit event in China is “very unlikely”, a Hong Kong-based analyst at UBS, said in a 15 November report.

Growth in assets kept on the balance sheet has outstripped off-the-book expansion, he wrote after studying 282 bank filings from Y 2016 and 1-H of Y 2017.

The conclusions add to a growing assessment that China will evade a financial crisis as authorities tighten their grip on structures such as wealth-management products.

While the People’s Bank of China (PBOC) still warns of “contagious and hazardous” risks, Moody’s Investors Service (NYSE:MCO) this month said regulation is biting and shadow banking has stopped growing.

Some individual lenders in China could be threatened by isolated items such as guarantees or asset-backed securities.

But with the exception of wealth-management products, Chinese banks mostly bear “little or no risk” from the off-balance sheet buildup, he wrote. Only 31% of the RMB 253-T total for Y 2016 contains any “meaningful risk” for banks.

“A significant portion of off-balance sheet exposures are composed of benign, no-risk or low-risk items,” he said. “The failure to distinguish the risk between these items and other high-risk or contingent off-balance sheet liabilities has often led to an exaggerated risk perception among many market watchers.”

Even the fastest-growing items off the balance sheet: ABS (asset-backed securities) pose little risk, according to UBS.

The 3,450% surge in ABS issuance since Y 2013 “is not quite the Red Flag it might appear to be,” he said. “The rapid growth of securitization has occurred in a highly regulated environment and it would appear to be part and parcel of a broader opening and reform of China’s credit markets beyond bank balance sheets.”

Have a terrific weekend.

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