Loan-for-bond swaps added around US$868b to banks' investment books.
According to Natixis Research, a major shift in banks’ balance sheets is underway, with assets moving from the loan book to the investment book. This can be partly explained by a general slowdown in the growth of loan demand, particularly from corporate borrowers while households’ are stepping up their leverage, albeit from low levels.
But Natixis Research notes that more important is the rise of three powerful trends:
• The ongoing swapping of local government loans into bonds, which added RMB2.5t (US$361b) to banks’ investment books in 2015 and over RMB6t (US$868b) in 2016;
• The increasing tendency for banks to purchase investment receivables in the interbank market in the form of wealth management products in order to boost their interest income; and
• The wave of debt-to-equity swaps which started last February and has recently accelerated.
"The result is that the balance sheets of Chinese banks, particularly joint-stock commercial banks (JSCBs) and city commercial banks (CCBs), as they further shift towards the investment book, look increasingly risky."
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