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Off-balance sheet financial items risky for China's banks: report

  • Staff Reporter
  • 2013-06-13
  • 17:08 (GMT+8)
Yuan coinage. (Photo/CFP)

Yuan coinage. (Photo/CFP)

Risks associated with derivative financial products and the off-balance sheet activities of financial institutions cannot be ignored as they have developed such products sharply and expanded rapidly, China's central bank warned in a report published on June 7.

Following mounting demands among investors for the preservation of the value of their financial products and their diversified allocation, financial institutions have developed a broad range of financial products since 2012, the People's Bank of China said in a report on the country's financial stability in 2013.

As of the end of the year, banks had launched 31,000 financial products worth 6.7 trillion yuan (US$1.1 trillion) in fund balances, which reflected a 64.4% year-on-year growth, representing an average yield rate of 4.32%. This has made them one of the most important financial investment tools, according to the report.

Behind the rapid development of financial products are the increased risks. Driven by dual demand for investment and financing, the development of cross-selling financial products has experienced accelerated growth. Some trust companies and securities firms, which serve as distribution channels for commercial banks, have funneled funds from banks' financial products into securities and the fund markets, according to the online version of Guangzhou's 21st Century Business Herald.

Some risks have occurred in the process as some products became an alternative to credit loans, while some capital has flowed into prohibited and restricted industries to evade financial supervision, according to the report.

The continuing expansion of banks' off-balance sheet items in recent years has become their main source of profit. As of the end of 2012, the balance of financial institutions' off-balance sheet items (including entrusted loans and entrusted investments) touched 48.65 trillion yuan (US$7.9 trillion), up by 8 trillion yuan (US$1.3 trillion) from early 2012. The figure accounted for 36.41% of their balance sheet assets.

Since the risks of these off-balance sheet items pose a threat to the balance sheet strength, there is a need to strengthen supervision in this area, the report said.

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