Chinese banks hide growing credit risks: Fitch

BEIJING: Chinese banks are creating a "growing pool of hidden credit risk" through financial moves that shift loans off balance sheets to comply with government capital requirements, Fitch Ratings warned on Friday.

The ratings agency said in a report the practice could lead to conditions similar to those which triggered the US subprime crisis, in which banks suffered huge losses on mortgage-backed securities when housing prices fell.

Fitch said banks were selling loans to financial institutions or repackaging them into wealth-management products in largely unreported transactions.

"These transactions, which free up space to extend new loans and lessen the pressure on capital and liquidity, can lead to a noticeable reduction in a bank's outstanding loans," analysts Charlene Chu and Wen Chunling said.

"Fitch suspects this activity was one factor behind the marked slowdown in aggregate loan growth figures in the second half of 2009, which may not have moderated as much as official figures suggest."

Chinese banks issued a massive 7.4 trillion yuan in new loans in the first half of the year -- including a monthly record 1.89 trillion yuan in March.

The spurt came as banks heeded official calls to pump money into the world's third-largest economy to ward off a slowdown in growth.

But the pace slowed in the second half after regulators told banks to curb lending and step up risk management amid bad-loan concerns and suspicions that stimulus funds were funnelled into stocks and property, sending prices soaring.

New loans totalled 294.8 billion yuan in November, up from 253.0 billion yuan in October, which was the lowest level of the year.

Banks argue they face "minimal risk of losses from such deals" and therefore do not need to disclose them in their financial statements, Fitch said.

But Fitch warned the situation bore the hallmarks of the subprime mortgage crisis.

"Permitting banks to transfer all of the credit risk to third parties shields them from the consequences of bad credit decisions, which over time could foster the same type of recklessness witnessed with the securitisation of subprime loans in the US," Fitch said.

Fitch said it expected loan growth in China to be "less brisk" in 2010, with new loans growing by 20 per cent year-on-year to eight trillion yuan.