In a subscribers-only story, the Wall Street Journal describes a troubling lender practice that Chinese banking regulators are starting to examine more closely.
The banks temporarily sell their loans to Chinese trust companies with a promise to repurchase the loans within a few years. This gives the banks more money to lend, while moving the loans off their balance sheets, making their loan exposure appear less than it is. The trusts repackage the loans into financial instruments for their clients.
If this sounds similar to the mortgage securitization practices in the U.S. that helped pump more money into risky loans, that's because it is similar, although the motivation also appears to be a way to reduce the banks' loan balances at a time when China's regulators are pushing banks to increase reserves to protect against bad loans, the article says.
Instead of being good, the banks are just trying to look good. That usually turns into a mess, whether you are Enron, Bernie Madoff or Tiger Woods.
As I wrote in this piece about the empty villas in one Chinese city, there may be good reason for regulators to be concerned about banks getting overexposed to bad loans.
One reason Chinese banks weren't so badly hurt in financial crisis — those nasty commie regulators wouldn't let them play the games the big boys in the west were playing.[h/t Fran in Spokane]