According to two sources who were familiar to the matter, the state of China had already drafted rules that will allow the state to ban banks and other financial institutions who from avoiding lending limits. These banks, the sources said, avoid lending limits via loan restructuring to other financial institutions such that the loans are recorded as asset sales.
The China Banking Regulatory Commission specifically imposed restrictions on the interbank business of lenders by disallowing borrowers from using resale or repurchase agreements in order to move their assets of their financial records, said the sources. The sources asked not to be named as they are not authorized to disclose information regarding the rules in public. The sources also added that the banks will be required to take in provisions on the said assets while transactions are still ongoing.
The new bank rules were seen as one of the measures promised by China's top politicians in the efforts of tightening lending, such as an audit of debt of the local government units and limitations by wealth management products on investments. The tightening, said Bloomberg, was done on the basis of the state's concern over the mound of bad debt that have incurred due to oversight in lending. The Communist Party chief of main finance and economic policy body had warned last week that at least two small banks would fail in 2014 due to short-term interbank borrowing reliance.
Northeast Securities Co analyst Wendy Tang said to Bloomberg over the phone, "China's banks and regulators are playing this cat-and-mouse game in which the banks constantly come up with new gimmicks to bypass regulations. The CBRC has no choice but to impose bans on their interbank business, which in recent years has become a high-leverage financing tool and may at some point threaten financial stability."
When asked by Bloomberg for comment regarding the report, the press office of CBRG did not respond immediately to the news agency's request by fax or email.
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