Crackdown on shadow lending working but overreliance on banks becoming a risk

Chinese firms are running low on funding options. A regulatory crackdown on a surge in shadow lending is starting to bear fruit, central bank data shows. Yet corporate bond issuance has also plummeted, and regulators are slowing IPO approvals. Once again the economy risks overdependence on bank lending.

China has upped the ante in its fight against spiraling corporate debt in 2017, with some degree of success. May credit data, released by the central bank Wednesday, showed that new trust loans, entrusted loans and bankers’ acceptances – common forms of non- bank or “shadow” credit in China – collectively expanded by a mere 28.9 billion yuan ($ 4.3 billion) in May, sharply down from April and at the slowest pace in seven months. That suggests deleveraging efforts have found traction after showing mixed results in the first quarter, when shadow borrowing quadrupled on an annual basis, jumping by 2 trillion yuan.

This may be welcomed by chief bank regulator Guo Shuqing, who vowed in March to fight “chaos” in China’s banking sector ahead of a key communist party congress later this year. In focus is China’s expanding shadow banking sector, which Moody’s estimated at $ 9.5 trillion yuan in assets at the end of 2016. While lending by non- bank players can perform a vital funding function, econo- mists are concerned by the sector’s more than doubling in size in just five years.

But pushing back too hard on alternative lending can have the unintended consequence of choking off credit to productive companies at a time when market financing avenues are being cut off. Net corporate bond issues fell last month by 246.2 billion yuan, the sharpest contraction on record according to Thomson Reuters data. Part of that is due to regulatory pressure on issuances by local governments and property developers, but it is also likely a reaction to rising interest rates. Meanwhile, China’s securities regulator has put the brakes on IPOs, with weekly approvals down to less than half in terms of funds compared to a year ago. That’s bad news for startups and private equity investors.

Keeping different funding channels open can help allocate capital more efficiently. That won’t happen if bank loans remain the only source of credit in China.