Licence to kill: why a 0.007% yield could be dangerous

If you want a barometer to gauge storminess in financial sector sentiment, you could do worse than look at one of the most prosaic of funding mechanisms for the global economy: a centuries-old trade finance product called a banker’s acceptance.

Comparable with other devices used to grease the wheels of trade — supply chain finance, factoring, invoice finance, letters of credit — banker’s acceptances are designed to be as safe as they are dull. They are collateralised, short-term payment promises guaranteed by a bank and rendered liquid by being tradeable on an exchange. A stable, predictable market should be a given.

But as Lex Greensill showed, even a mundane financial product can be turbocharged into something that bears little resemblance to the original concept, hides risk off-balance-sheet and causes billions of dollars of losses to investors who don’t pay attention. Just ask Credit Suisse, now embroiled in a web of legal claims from clients which had funds invested in Greensill’s “innovative” take on supply chain finance.

For years, China’s banks and the broader Chinese financial sector have been innovating in a not dissimilar way with banker’s acceptances. According to CEIC Data, China’s banker’s acceptances market was worth Rmb3tn late last year, down from a peak of close to Rmb8tn in 2014, but still vast and a key part of the shadow banking activity that China has relied on to fuel its growth.

Shadow banking as a proportion of…

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