As Wang Shi 王石 steps down as CEO of Vanke, China's biggest real estate developer, it is unclear what will happen to the holdings of Baoneng, a third-tier firm in the same industry, writes Wang Shuo 王烁 Caixin editor-in-chief. The bigger question is what will happen to the shadow banking system that enabled Yao Zhenhua 姚振华 Baoneng founder's hostile leveraged takeover of Vanke in mid-2015.
An official estimate puts the size of China's shadow banking industry at C¥91 tn. In China, a big part of shadow banking lies in the banking sector itself, where banks issue wealth management products to savers-turned investors and use the funds raised to purchase trust products and unsecured bonds. All of these are kept off balance sheet as probable liabilities and assets, with the help of trusts, securities, insurance, and funds as conduits, notes Wang.
Any firm's financing needs can be packaged into a product through the shadow banking system and sold to individual investors, says Wang. Apart from leveraging Foresea Life's funds raised through the sale of universal life insurance, Baoneng issued structured products against the takeover of Vanke. As the structured products were then packaged into structured products over and again, when they are finally sold to savers-turned investors by the banks, investors are unable to see the true underlying risks. If Vanke's stock prices fall, losses will be passed on from Baoneng to individual investors, who count on banks to guarantee the value of their investments.