How Chinese Banks Reduce Lending While Expanding Credit and the Hidden 2 Trillion RMB in Liquidity : A Case Study on the Bank of Chongqing and Huishang Bank

Chinese banks have sought ways to rapidly expand lending in light of strict regulatory mandates to reduce official lending and maintain high capital adequacy ratios. Through arbitraging capital risk weights, total lending has expanded while capital adequacy ratios have remained unchanged. Off-balance sheet transactions using lower credit quality assets to collateralize repurchases remain a channel for banks to increase their balance sheet and reduce official lending. Many banks even classify repurchase lending underneath the heading of lending to banks. As back door lending funds roll-overs and commodity speculation, banks' inherent liquidity risk exposure causes investors to significantly underestimate systematic risk. Huishang Bank's expansion of arbitraged credit lines into high risk areas has forced the bank to increase Treasury assets 100 billion rmb in 18 months for a net profit increase of 16 million rmb or a marginal return on net assets of 0.015% — in essence — zero