March 10, 2014 1:47 pm

China shadow lending slows sharply

Chinese currency©Getty

Shadow lending in China slowed sharply in the first two months of the year as government efforts to control financial risks led banks to bring more credit back on to their balance sheets.

But even as shadow financing was squeezed, China’s broad money growth remained stable, with the drop in lending by non-bank financial institutions such as trust companies almost entirely replaced by an increase in conventional bank loans.

On-balance-sheet bank loans accounted for nearly 64 per cent of new credit issuance in China in the first two months of 2014, up from 55 per cent last year. At the same time, lending by trust companies fell from nearly 11 per cent of new credit to just over 5 per cent.

“It’s quite clear what is happening. The central bank has been deleveraging the shadow banking sector and encouraging banks to bring loans back on to their balance sheets to monitor risks,” said Shen Jianguang, an analyst with Mizuho Securities. “They are trying to slow shadow banking activity but still want overall liquidity to be strong.”

Over the previous three years, caps on bank lending pushed credit-hungry borrowers into the arms of other financial institutions that were able to offer them loans, though often at higher rates. Many of the borrowers that tapped the shadow lenders were customers deemed too risky for the country’s banks such as local government investment companies and property developers.

Alarmed at the surge in lending outside the formal bank sector, regulators last year made it harder for companies to funnel money from the interbank market into more lightly-regulated shadow credit products. Intensive media coverage of the near-defaults of two trust company products earlier this year may also have discouraged investors from providing more funding to the shadow sector.

Analysts have forecast that the policy moves to slow non-bank lending could drag on economic activity this year. The government has signalled that it is also willing to tolerate a slower expansion than last year’s 7.7 per cent growth, with Lou Jiwei, China’s finance minister, saying that even 7.2 per cent would be acceptable.

But amid signs of slower growth in recent weeks, the government has presided over a loosening in monetary conditions, suggesting that it does not want the economy to weaken too abruptly. The seven-day bond repurchase rate, a key indicator of liquidity, fell to a 21-month low on Monday at 2.37 per cent.

The drop in the funding rate is an indication of sluggish demand for loans, but could in itself also spur borrowers to come back into the market for new credit. “We expect new loans and total social financing to rebound in March,” said Lu Ting, an economist with Bank of America Merrill Lynch, referring to the broadest official measure of financing in the economy.

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