China's banking regulator has ordered banks to bring loans to trust companies back onto their balance sheets, in an effort to control risk in the banking system.
The China Banking Regulatory Commission has issued a directive requiring banks to comply within two years. Banks rushed at the beginning of the year to sell loans to trust firms, which repackaged them as wealth management products. By doing so, the lenders were able to circumvent credit quotas and offer big depositors a much higher-yielding alternative.
Fitch Ratings estimated that, after adjusting for loan repackaging via trusts, net lending by Chinese banks in the first half was closer to 5.9 trillion yuan, instead of the official figure of 4.6 trillion yuan.