Chinese bank regulators are wresting the punchbowl from lenders drunk on off-balance sheet funding. To rehydrate, securities issuance rather than strong green tea, a traditional hangover cure, is required. Some of the palliatives, such as convertible bonds, could be good pick-me-ups for investors too.
China’s top regulators aim to curtail key shadow banking practices by 2019. Maturity mismatches between off-balance sheet assets and liabilities, as well as implicit guarantees offered on wealth management products backed by risky investments, are among their concerns.
New rules make it tougher to extend maturities on such products and could force them on to the balance sheet. Credit Suisse thinks such shadowy assets could cause total loans to exceed deposits at Minsheng and Citic Bank. Joint stock banks as a group could see their tier one capital diluted by an average of 51 basis points, causing some to sink towards their regulatory minimum. Larger banks are thought to be more insulated.