|China Issues Draft Rules Restricting Entrusted Lending|
China's banking regulator has issued draft rules to tighten supervision of entrusted loans, a kind of shadow banking product, in a move seen targeting excessive leverage used to speculate on stocks.
Entrusted loans - a form of inter-company loan in which one firm serves as the ultimate lender and records the loan asset on its balance sheet while banks act as intermediaries and collect a fee - have become an alternative channel to margin lending from brokerages.
Such loans are considered a potential risk to banks given the revolving nature of bank credit and borrowers, in which entrusted loans can be used to generate fresh bank credit in some cases.
The draft rules issued by the China Banking Regulatory Commission (CBRC) for public comment late on Friday states that five categories of funds must not be used for entrusted loans, noticeably bank lending to companies and funds those companies have raised from other investors.
The public has up to Feb. 16 to suggest amendments to the rules.
Entrusted loans are just one of several channels through which non-financial firms offer credit to one another. Other methods include corporate discounting of bank acceptance bills, as well as corporate purchases of trust products, which are usually backed by high-interest corporate loans.
Funds of entrusted loans typically flow into risky assets such as property and stocks more than other forms of shadow banking businesses.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Jan.19, 2015