Find out what has spurred Chinese banks to extend quasi-loans

It's all about near-term profitability.

According to Bernstein Research, over the past 3 years, the Chinese banks have been extending and financing credit to corporations in a manner that doesn’t count towards their loan totals which are restricted by a number of regulatory measures. These loans that are not counted as loans can be called as "quasi-loans".

Bernstein noted that there are a number of reasons banks have been issuing credit outside of their traditional loan book but the key reason has been the banks' aim to maximize near-term profitability.

Here's more:

This is particularly true with the small and mid-sized banks whose employees are more incentivized to boost short-term profits, even if it does add to the longer-term risk of the bank.

There are quite a number of constraints placed by the Mainland banking regulators on Chinese banks' loan growth. These constraints inhibit banks' ability to make traditional bank loans. One of the largest constraints is the 75% loan-to-deposit ratio ceiling, which prevents banks from extending loans beyond 75% of their deposit balance.

In recent years, competition for deposits has increased among banks (especially the smaller banks), which also serves as a constraint to banks' lending capacity.

The country's evolving wealthmanagement market (trust products, mutual fund, wealth management products, etc.) has become a more popular alternative than traditional bank deposits for institutions and individuals to park their excess cash, slowing deposit growth. All of this has slowed the banks' capacity for traditional loan growth.