Jianjun LiSchool of Finance, CUFEJune 29.2013

The Credit Size and Structure of Shadow Banking in China

CUFE Workshop on Global and Chinese Shadow Banking Risk

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Outline

Introduction: background and issues The differences of shadow banking system between

China and the developed countries The credit size of Chinese shadow banking sector The structure of Chinese shadow banking with informal

finance Conclusion

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Introduction: background and issues Some data about Chinese Shadow banking system

scale: 28.8 trillion RMB(BOC,2012); 30 trillion RMB (Guangfa Securites,2012); 36 trillion RMB (JP Morgan Chase,2013)

Banking regulatory authorities: what and which belong to shadow banking: Non-bank financial institutions ? Wealth management products? Informal finance?

Debates and differences on defining the shadow banking system in China: shadow bank or shadow of bank.

No consistent definition, no same data of size How to understand the particularly of Chinese shadow

banking, and the size of Chinese shadow banking: the aim is to try to estimate the size and growth rate of the financial assets in the shadow banking sector.

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The differences of shadow banking system between China and the developed countries

Definitions of shadow banking system since 2007. There is as yet no clear commonly-agreed definition. Two perspectives of defining the term:

(1) Regulatory perspective or macro-perspective: credit intermediation involving entities and activities outside the regular banking system (Paul Maculley, 2007, Geithner,2008, IMF,2008, Tucker,2010, Gorton and Metrick, 2010)

(2) Function perspective or micro-perspective: credit intermediation involves credit, maturity, and liquidity transformation. (Pozsar Zoltan etc.2010)

Official definition (composite) (FSB,2011), broad definition, the system of credit intermediation that involves entities and activities outside the regular banking system; narrow definition, focus on risks created by maturity/liquidity transformation, flawed credit risk transfer and leverage;

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The differences of shadow banking system between China and the developed countries

Definition of shadow banking in China

Monetary market instruments without central bank liquidity support (Yi Xianrong,2008, Xie Ping,2013)

Bank-like credit intermediation, non-bank financial institutions (Zhou liping,2011, Xia Bin,2013)

Parallel banking system including informal finance (Wen Weihu & Rong Chen, 2010)

Generalized shadow banking: shadow bank, shadow credit market (Li Jianjun, 2012)

Official definition: CBRC is discussing now, what products and which institutions belong to shadow banking

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Particularities of Chinese shadow banking Chinese shadow intermediation is not a system, no

credit derivatives market, a short chain of securitization (Step (1) Loan Origination；Step (2) Loan Warehousing；Step (3) ABS Issuance ；Step (4) ABS Warehousing；Step (5) ABS CDO Issuance; Step (6) ABS Intermediation；Step (7) Wholesale Funding)

Chinese financial repression and financial liberalization reform making the complex financial structure: market and shadow market; credit intermediation and shadow credit intermediation

A regulatory arbitrage concern: credit limited policy put banks innovate instruments and move business off-balance sheet

Facilitating maturity/liquidity transformation and leverage: WMPs are almost structural products off-balance sheet.

The differences of shadow banking system between China and the developed countries

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Mechanism of Chinese shadow banking

Loan Market:Bank and Non-bank

Monetary Market:Inter-bank Market

Capital Market:Exchange market

Banks and non-bank loanenterprises — depositors

Non-bank institutions loan:Small loancompanies,fnancing guarantors, pawnshops.etc. SMEs---depositors(investors)

Informal loan:Investment companies,loan brokers and internet lenders,etc.SMEs--- depositors(investors)

Debt instruments:(ABS,CP,SCP,PPN,MTN,SMECN2,ABN)Enterprises--institutional investorsMSEs--institutional investorsSecurities companies----institutional investors

Funds and brokers WMPsenterprises — investorsBanks and trusts WMPs

enterprises — depositors

Repos:brokers—investors

Repos:enterprises, financial institutiona —institutional investors

Debt instruments:(Corporation Bonds)enterprises — investors

ABS:banks—brokers—investors

Equities:corporations—investors

Inter-bank offering:Banks and institutional investors

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(1) Chinese shadow banking instruments: ABS: securitization of credit assets started in 2005, stopped in

2007, restarted in 2012 Repos: started at inter-bank market since 1997, appeared in

exchanges market in 2002 (Shanghai) and 2003 (Shenzhen) MMF: started to issue in 2003. CP: started in 2003, inter-bank market SCP: started in 2010, inter-bank market MTN: started in 2008, inter-bank market PPN (private placement note): started in 2011 at inter-bank market ABN : started in 2012 , inter-bank market SMECN: started in 2009 , inter-bank market GSE bond: started in 2009 , inter-bank market CRMW(Credit Risk Mitigation Warrant:) started in 2010 at inter-

bank market WMPs: banks2003, trusts 2008, securities,2011

The credit size of Chinese shadow banking sector

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The credit size of Chinese shadow banking sector (FSB: Trading of credit-related financial instruments such as bonds and

structured/hybrid financial products meanwhile would be included in the scope of broad SB definition. )

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The credit size of Chinese shadow banking sector Scale of Chinese shadow

banking instruments value

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The credit size of Chinese shadow banking sector Credit Size of Chinese shadow banking instruments to

bond outstanding, stock of bank loan and GDP

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The credit size of Chinese shadow banking sector The value of Chinese shadow banking instruments is 19.75 trillion

RMB(or 3.2 trillion USD) at the end of 2012 and reached 23.98 trillion RMB (or 3.9 trillion USD ) till May,2013

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The credit size of Chinese shadow banking sector(2) Shadow credit market (Non-bank institutions loan) Small loan companies (regulated by local government), 635 billion

RMB (till May, 2013)

Financing guarantors (regulated by local government), 900 billion RMB (expected)

Financial leasing (out of regular banking system), 1700 Billion RMB (expected)

Pawnshops lending, 800 billion RMB (expected)

Internet lending (evaluated over 100 billion RMB )

Investment (including PE,500 billion) and assets or informal wealth management (Data N.A)

Traditional informal financing (evaluated 4 trillion RMB)

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The structure of Chinese shadow banking with informal financeThree parts structure of shadow banking sector: Part 1: credit instruments at monetary market and capital

market, the value is about 5.58 trillion RMB or 907 billion USD

Part 2: WMPs and trusts in banking and securities industry, the outstanding is about 15.75 trillion RMB or 2.56 trillion USD

Part 3: lending by non-bank institutions 4.63 trillion RMB or 753 billion USD. The investment and informal lending data is over 4.5 trillion or 732 million USD.

The total credit value is over 30 trillion or 4.95 trillion USD

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Chinese shadow banking credit products including monetary and capital market instruments, banks, securities dealers and trusts wealth management products.

As the shadow of banks, non-bank institutions out of CBRC regulatory do loan business and expand credit scale to some extent.

The credit size of Chinese shadow banking including non-bank and informal finance is about 46% to bank loan, 60% to GDP.

The pyramid structure of Chinese shadow banking is different with it in most developed countries.

Conclusion

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Jianjun Says:

Thank you for you attention!

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