The firm behind one of the top China analysts in the world is warning of a ticking time bomb
"About 44,000 [WMPs] were outstanding at the end of 2016. This is nearly six times the number of outstanding mortgage-backed securities at western banks at the heart of the 2008 financial crisis."
"Transferring assets into hidden channels distorts the data to assess the health of banks ... WMPs in particular could be ticking time bombs, due to their short maturities."
"At the end of 2016, $3.7 trillion in assets had been internally offloaded by Chinese banks into off-balance sheet WMPs, while another $1.9 trillion had been externally offloaded into AMPs."
"In the most common [external channel] transaction, banks sell loans to non-banks, who then package the loans into asset management plans (AMPs), which are then resold to banks. What previously had been a corporate loan now becomes an investment of the bank in AMPs."
!["In the most common [external channel] transaction, banks sell loans to non-banks, who then package the loans into asset management plans (AMPs), which are then resold to banks. What previously had been a corporate loan now becomes an investment of the bank in AMPs."](https://staticbiassets.in/thumb/msid-59978794,width-700,height-525,imgsize-234/in-the-most-common-external-channel-transaction-banks-sell-loans-to-non-banks-who-then-package-the-loans-into-asset-management-plans-amps-which-are-then-resold-to-banks-what-previously-had-been-a-corporate-loan-now-becomes-an-investment-of-the-bank-in-amps-.jpg)
"Internal channel business takes place through banks transferring assets into Wealth Management Products (WMPs), which the banks then sell to depositors and investors. This enables banks to bypass detailed assessments of the quality of the assets."
"In China, the offloading of assets by banks is referred to as channel business. There are two types of channel business: internal, meaning banks shift around the assets themselves, and external, in which banks enlist other entities to help them."
"Why do this? Because keeping the asset could be damaging. For example, it may show that the bank has a large amount of loans that are bad."
"The second accounts for the majority of activity, and involves Chinese banks transferring credit from their own balance sheets into the shadows."
"There are two forms of shadow credit in China. The first involves small lenders who extend credit to borrowers who can't obtain regular loans."
"China's shadow finance system is often likened to a black hole, one that involves a confusing hodgepodge of acronyms and becomes more complex and opaque each year."
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