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What is the basis for the survival and development of China’s shadow banks?

The meaning and background of shadow banking

Based on various studies since 2007, the foreign definition of shadow banking can be summarized as: engaging in asset management outside the traditional commercial banking system. Securitization activities, financial intermediaries that carry out term, credit or liquidity transformations, are not regulated by Basel III or equivalent, nor do they receive liquidity support from central banks or credit guarantees from public authorities. These financial institutions can include investment banks, structured investment vehicles, asset-backed commercial paper, hedge funds, money market funds, bond insurance companies, financial companies, etc. All support provided by traditional channels (commercial banks, rating agencies, etc.) for shadow banking also belongs to shadow banking activities.

In the past few years, Chinese commercial banks have actively transferred assets and liabilities from on-balance sheet to off-balance sheet to avoid regulatory constraints. This article believes that this off-balance sheet financing business led by commercial banks constitutes The main body of China’s shadow banking. In this process, other financial institutions have extensively participated in the development of shadow banking, mostly by providing channels to commercial banks. From this perspective, the essence of China’s shadow banking business is the shadow business of commercial banks. In specific practice, it is manifested in the externalization of balance sheets by commercial banks through credit financial products.

China's main monetary and credit aggregate indicators have declined to varying degrees in the past two years or so. For example, looking at the year-on-year growth rate of M2, it was 13.6 and 13.8 respectively in 2011 and 2012, which was significantly lower than the average growth rate of 17.8 from 2000 to 2010 and the average growth rate of 16.5 from 2000 to 2008. Another example is observing the social financing scale indicator. Calculations show that the balance of social financing scale increased by 18.5 and 19% year-on-year in 2011 and 2012, which was lower than the average growth rate of 21 from 2002-2010 and slightly lower than the 2002-2008 growth rate.

The average growth rate is 19.3. The year-on-year growth rate of the balance calculated for the scale of social financing and the total amount of foreign exchange held was 17 and 15 respectively in 2011 and 2012, which was lower than the average of 23 from 2002 to 2010 and the average of 22 from 2002 to 2008. It was the lowest level in the past ten years and declined. The amplitude is significant.

Although the rapid economic downturn in the past two years may indeed have reduced the demand for money and credit, the contraction of the supply of money and credit may be a more basic reason. The key evidence to identify this is that while the growth rate of money and credit supply is declining, the central interest rate levels in various markets have risen significantly.

In the treasury bond market, in 2012, against the backdrop of economic slowdown and the end of monetary tightening, the yields on treasury bonds of all maturities declined to a certain extent. However, what is very significant is that the bottom level of this round of decline in treasury bond yields is Significantly higher than other periods (such as 2002, 2005, and 2009), the performance of the 1-year Treasury bond yield is particularly outstanding.

In the credit market, the weighted average interest rate of RMB loans shows similar results to the treasury bond market. Although the scale of direct financing is getting larger and its status is becoming more and more important, the proportion of financing achieved through the credit market among the total financing of the real economy is still more than 50%. Therefore, the interest rate level of the credit market is still the highest for the whole society. It is a good measure of the tightness of funds; in addition, from 2003 to the end of 2004, there were fewer and fewer restrictions on the rise of loan interest rates, and finally they were free to rise after 2004, which made the credit interest rate index of the banking system more realistic. Measure the supply and demand for funds in the credit market. In 2011 and 2012, the annual average levels of loan weighted interest rates were 7.6 and 7.1 respectively, with a very limited downward trend and significantly higher than the historical situation in the past ten years.

Observing other types of interest rate indicators, such as 6-month SHIBOR, 6-month direct bill price, etc., generally point to the same results. The rise in interest rates in various markets suggests that the decline in the total amount of money and credit was mainly affected by the contraction of supply.

What is the reason for the contraction of money and credit supply? In the past two or three years, from an aggregate level, two far-reaching changes have taken place in China's money and credit supply. These two changes occurred simultaneously, causing the financial system's money supply capacity to be systematically suppressed and forming a Understand the macro background of the rise of shadow banking business.

First, changes in the base money supply. For a very long time after the promulgation of the "People's Bank of China Law", almost the only channel for China's base money supply was the high-speed injection of foreign exchange funds. However, since 2010, this situation has changed systematically, and the growth rate of foreign exchange outstanding has declined significantly. In 2012, it dropped to 2, which was significantly lower than the nominal GDP growth rate. As long as there are no other channels to supply base money and the money multiplier remains unchanged, the decline in the growth rate of foreign exchange purchases will inevitably make the supply of money and credit unable to meet the reasonable demand for it by the economy.

Secondly, changes in the credit creation capabilities of commercial banks. The rapid expansion of loan scale in the past few years has brought the loan-to-deposit ratio of commercial banks close to the upper limit required by regulatory regulations. This is especially true in the field of joint-stock and small and medium-sized banks. Further taking into account the relatively high deposit reserve ratio restrictions and regulatory authorities' requirements for capital adequacy ratios, commercial banks' ability to increase the money multiplier by increasing their lending propensity (the ratio of loans to total assets) is severely restricted. Simply, loans and statutory reserves can be combined and calculated as a proportion of commercial bank deposits. In the past two years, this ratio has risen to around 85, the highest level in the past decade.

With the slowdown in base money supply, commercial banks could have adjusted the supply of money and credit by increasing their lending propensity; however, in the past two years or so, the slowdown in base money supply has been inconsistent with the credit creation of commercial banks. Capacity constraints occur simultaneously, ultimately causing the financial system's ability to supply money and credit to be systematically suppressed.

The Development and Scale Assessment of Shadow Banking

When credit supply is suppressed and demand for credit is still relatively strong, commercial banks actively develop off-balance sheet financing systems to avoid deposits. regulatory constraints such as loan-to-loan ratios, capital adequacy ratios, and deposit reserves, thereby increasing its lending propensity. In recent years, the scale of off-balance sheet financing business represented by financial products has expanded rapidly.

Nominally, the investment risks of most financial products are borne by the customers themselves, but in fact, most risks of commercial banks’ off-balance sheet businesses, especially the systemic risks, will eventually return to the commercial banks’ balance sheet. Inside. In this sense, shadow banking may become the source of future financial risks.

In China's financial system, compared with other types of financial institutions, commercial banks have an unparalleled huge customer base, which makes stocks, bonds, trusts, insurance and other non-bank financial institutions Products often need to use the channels and networks of commercial banks to sell them. Therefore, it is logical and natural to use financial products as a form of wealth management products outside the balance sheets of commercial banks to help non-bank financial institutions complete the financing process and realize the channel value of commercial banks.

The rapid development of off-balance sheet business of commercial banks (bringing intermediary business income) has been going on for a relatively long time. What this article attempts to emphasize is that due to the macroeconomic background discussed above, in the past two years or so, in order to circumvent regulatory constraints and improve credit supply capabilities, commercial banks have begun to actively transfer more and more assets and liabilities to Outside the table. This process has broken away from commercial banks’ pursuit of channel value and has become the main content of the “shadow banking” discussed in this article.

An angle worth considering is to observe the difference between the return rate of capital-guaranteed financial products and the interest rate of bank time deposits of the same term. The financial product market has gradually developed since 2004, but until 2010, the number of financial management products issued by the banking system was still small. Among them, the difference between principal-guaranteed financial products and deposit interest rates of the same term fluctuated around 70 basis points; while in 2010 Since then, the number of financial products has expanded rapidly, and the interest spread has expanded to more than 110 basis points, and continued to climb in 2011 and 2012.

Looking at the problem from the perspective of commercial banks, financial products have formed a substitute for time deposits, but the cost is higher. Why are commercial banks willing to have this substitution process happen? The key reason is that wealth management products save commercial banks’ capital consumption.

Under equilibrium conditions, the net benefits of time deposits to commercial banks on the balance sheet (interest spread income minus provisions and capital costs) and the net benefits of financial management products off the balance sheet (net income from intermediary business) ) should be the same. Therefore, the aforementioned interest rate spread is closely related to the capital cost of commercial banks. The significant increase in interest rate spread since 2010 can be roughly interpreted as an increase in the capital cost of commercial banks. The main reasons are obviously the constraints of loan-to-deposit ratio, capital adequacy ratio and Limitations formed by the reserve ratio. This also shows from another level that the limited supply of money and credit in the past few years has accelerated the rise of shadow banking.

The social financing scale index collected and released by the central bank is a useful supplement to traditional money and credit statistics. Based on this, a rough estimate of the scale of shadow banking can be made. In the scale structure of social financing, the shadow banking products developed by commercial banks enter the liabilities or equity sides of the real economy sector through channels such as entrusted loans, trust loans, undiscounted bank acceptance bills, and corporate bonds. Therefore, they directly affect the four types of business. Different assumptions about the proportion of financing business and off-balance sheet financing business affect the calculation of the scale of shadow banking.

Hypothesis 1: It is assumed that the proportion of direct financing business among the four types of financing business is 0, and the scale of the four types of financing business at the end of 2002 is 0. It can be calculated that the scale of the four types of financing business at the end of 2012 was 21.9 trillion yuan. Obviously, 21.9 trillion is an overestimate of the scale of shadow banking.

Hypothesis 2: Assume that before 2005, 2005 and 2009, the proportion of shadow banking business among the four types of financing business was 0. Setting the value before 2005 to 0 mainly takes into account that its development is still immature, and the issuance scale of bank financial products before 2005 was relatively small. In addition, according to the understanding of this article, during the period of loose liquidity in the real economy, commercial banks' on-balance sheet credit is quite smooth, and the motivation to develop off-balance sheet business is not strong. Judging from the interest rates in various markets, in 2005 and 2009, the cost of funds in the real economy was low and liquidity was relatively loose. The proportion of the four types of financing in domestic and foreign currency financing calculated in this way in 2005 and 2009 fully represents the proportion of direct financing business in the four types of business. Assuming that this proportion has increased at a constant rate since 2005, this can eliminate the proportion of previous years. The amount of direct financing business among the four types of business leaves the scale of shadow banking business. Under this assumption, the scale of shadow banking at the end of 2012 was 7.1 trillion. We suspect that this estimate is too optimistic about the development of direct financing business, thereby underestimating the size of silver banks.

Hypothesis 3: Set the scale of shadow banking before 2005 and 2005 to 0; among the four types of business in 2009, the ratio of direct financing to shadow banking business was 1:1; in addition, due to the , commercial banks are increasingly participating in the competition for off-balance sheet financing. Under this squeeze, the proportion of direct financing business spontaneously carried out by other non-bank institutions is difficult to significantly increase, and they instead provide channels and other services to commercial banks. Therefore, it is assumed that after 2009, the proportion of direct financing in the four types of business remains constant, and the expansion of the proportion of the four types of business in domestic and foreign currency loans is entirely due to the expansion of shadow banking business promoted by commercial banks. Under this assumption, the scale of shadow banking at the end of 2012 was 10.8 trillion, which may be closer to the true scale of shadow banking than assumptions 1 and 2.

The corporate sector’s balance sheet maturity mismatch and its risks

As a financial innovation, the shadow banking system fills the gap between money and credit supply and demand, and also causes risks to all parties involved. worries. First, consider the problem from the perspective of corporate balance sheets. The supply of corporate short-term loans and short-term credit bonds can be used to measure the short-term capital inflow of the corporate sector, and corporate demand deposits can be used to measure the short-term capital outflow of the corporate sector.

Before 2011, the growth rate of short-term capital inflows in the corporate sector was systematically lower than the growth rate of financing outflows. After 2011, this relationship was reversed, and the growth rate of short-term capital inflows exceeded the growth rate of financing outflows. So far, it has maintained two levels. More than a year.

More intuitively, the data can be further processed to calculate the net inflow of short-term funds in the corporate sector and examine its changes in the ratio to nominal GDP. Under normal circumstances, the corporate sector obtains a large amount of long-term loans from banks. Part of these long-term funds are used for fixed asset investment, and the other part is used to meet the payment needs of enterprises, which is reflected in the growth of demand deposits. This means that the corporate sector is long-term. The net inflow party of end-end funds is the net outflow party of short-end funds. The calculation results also show that in most years, the corporate sector’s annual net short-term capital inflow is negative, and since 2011, the corporate sector has begun to show net short-term capital inflows.

In fact, considering that the large amount of short-term capital inflows provided by bank wealth management products to the corporate sector is not reflected in the calculations, the real scale of net short-term capital inflows into enterprises may be even larger. What is the reason why the corporate sector has changed from a net short-end financing source to a net recipient?

Generally speaking, the rapid growth of net short-term capital inflows from the corporate sector over a period of time can be allocated in three directions: growth in accounts receivable, accumulation of inventory, and expansion of construction projects in progress. .

In the mid-to-late 1990s, the corporate sector also experienced a large net inflow of short-term funds. The emergence of this situation at that time may be mainly due to the expansion of the scale of triangular debt. Companies defaulted on each other's payments, forcing them to invest a large amount of short-term funds to maintain daily operations. During this round of economic downturn, it is undoubtedly difficult to rule out the possibility of a large-scale increase in triangular debt. However, judging from the performance statistics of industrial enterprises, there has been no significant growth in accounts receivable. In 2012, the receivables of industrial enterprises above designated size were The ratio of accounts to main business income was 9.0, an increase of only 0.6 percentage points from 2011. Listed company-level data show a similar situation.

Generally speaking, the inventory adjustment cycle of enterprises is about 2-3 quarters, which is difficult to exceed 1 year. Therefore, it can be reasonably believed that inventory changes are unlikely to be the net inflow of large amounts of short-term funds by enterprises. main destination. Calculating the proportion of inventories in main business income of industrial enterprises above designated size, it was 3.3 in 2012, a slight decrease of 0.1 percentage points from 3.4 in 2011, reflecting the actual destocking behavior of industrial enterprises.

Therefore, the explanation that this article tends to accept for the net inflow of short-term funds from the corporate sector is that in recent years, the corporate sector has used a large amount of short-term borrowings to support projects under construction, or in other words, at the level of capital utilization , enterprises borrow short-term and use it long-term, which is accumulating obvious maturity mismatch.

In fact, abnormalities in short-term capital demand can also be found from the fluctuations in capital prices of different maturities. Observing the treasury bond market, the bottom level of the term spread in this round is lower than in the past (2005, 2009, etc.). Especially in the second half of 2011, the yield curve was abnormally flat and almost inverted; and after the end of monetary tightening, Against the background of economic stabilization and recovery, the recovery of term spreads has been much slower than in other periods in history. In the context of corporate balance sheet maturity mismatch, corporate short-term loans and long-term use mean that the benchmark for short-term capital prices is the long-term return on investment. A large amount of capital demand shifts to the short-term market, which naturally pushes up the price of short-term funds and makes the maturity Interest rate spreads narrowed. In addition, companies with serious mismatches in capital utilization periods have higher credit risks, which may also contribute to the flattening of the yield curve.

How does the balance sheet maturity mismatch in the corporate sector arise? In 2009, the supply of short-end funds was loose and short-end interest rates were very low, which may have largely contributed to the mismatch in the balance sheet maturity of the corporate sector. Through short-term loans and long-term use, the corporate sector reduced financing costs. However, in the following years, the maturity mismatch of corporate sector balance sheets has not been resolved. On the contrary, it may become more serious and closely linked to the accelerated rise of shadow banking.

The reasons for this consequence may come from the following aspects: First, due to risk regulation, industry regulation and monetary tightening, the long-term capital supply of commercial banks' traditional business in local government infrastructure investment, real estate development investment, real estate mortgage and other fields has been affected. suppression, causing the long-term funding needs of financing platform companies and real estate development companies to shift to the shadow banking system; secondly, a large number of small and medium-sized enterprises have turned to the shadow banking system for their long-term funding needs because they are unable to provide suitable collateral, while the marketization of interest rates and the development of direct financing methods Competition also forces commercial banks to pay more attention to SME financing than before.

From the perspective of product statistics, most bank wealth management products have a term of less than 6 months, which means that shadow banking business, while making up for the gap between the supply and demand of money and credit in the real economy, has exacerbated the balance sheet problem of the corporate sector. Term mismatch.

What kind of economic and financial risks are involved in the maturity mismatch in the use of funds by enterprises and shadow banks?

We can first pay attention to the historical experience of the American Savings and Loan Association. The model of savings and loan associations is to attract low-cost short-term funds to support long-term home mortgage loans. Since short-term funding is generally cheaper, this business model produced reasonable returns for the industry until the 1960s. In the 1970s, with high inflation and rising interest rates in the United States, the cost of funds for savings and loan associations rose rapidly. However, the return levels of most of their assets were locked earlier, which brought fatal consequences to the industry. of blow.