New | China issues draft rules to tighten supervision of entrusted loans
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
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.
The move follows an announcement on Friday that regulators would crack down on excessive margin finance by certain brokerages, and Chinese stock markets plunged on Monday as regulators signalled concern about valuations in the wake of a massive stock rally in the fourth quarter.
The CSI300 Index opened down 6.1 per cent on Monday, and futures tracking the index also dived as investors sold off shares in index heavyweight banks and brokerages.
"The impact of industry overcapacity, local government debt, shadow bank and property risk on the capital markets is not negligible," China Securities Regulatory Commission chief Xiao Gang said in a report on the CSRC website. His comments were made in a speech at an industry conference in Beijing last week.
"The scale of margin trading has grown rapidly, exceeding 1 trillion yuan by the end of 2014, with trading leverage rising obviously. Some brokerages have borrowed short-term money but lent as long-term loans, facing relatively high liquidity risk."
