China to re­duce shadow bank­ing

The Star Early Edition - - BUSINESS REPORT | INTERNATIONAL - Sa­muel Shen and John Ruwitch Shang­hai

CHINA’S cam­paign to cut high debt lev­els in its econ­omy is aim­ing this year to shrink the $3 tril­lion (R40 tril­lion) shadow bank­ing sec­tor, which could drain a crit­i­cal source of in­come for the coun­try’s banks and of fund­ing for its frag­ile bond mar­ket.

Shadow bank­ing, a term for fi­nan­cial agents that per­form bank-like ac­tiv­ity but are not reg­u­lated as banks, has boomed in China, the world’s sec­ond-largest econ­omy, as a way of cir­cum­vent­ing the gov­ern­ment’s tight con­trols on lend­ing.

It has been a key driver of the break­neck growth in debt in the econ­omy, which UBS says rose to 277% of GDP from 254% in 2016, and is now a tar­get as Bei­jing tries to re­duce that fig­ure be­fore it desta­bilises the econ­omy.

But with banks’ shadow bank­ing busi­ness ac­count­ing for about a fifth of to­tal out­stand­ing loans, an­a­lysts fear that the un­in­tended con­se­quences of gov­ern­ment ef­forts could trig­ger the fate it seeks to avoid.

“We see a pol­icy-in­duced dras­tic delever­ag­ing in shadow bank­ing as a pol­icy mis­cal­cu­la­tion that could trig­ger un­ex­pected tail risks for the bank­ing sec­tor,” said Liao Qiang, credit an­a­lyst at S&P Global Rat­ings.

New rules

In­vestors’ con­cerns stem from new rules this month that put lenders’ wealth man­age­ment prod­ucts (WMPs), the big­gest com­po­nent of shadow bank­ing, un­der the scru­tiny of the Peo­ple’s Bank of China for the first time and into its cal­cu­la­tions on pru­dence, cap­i­tal ad­e­quacy and loan-growth guide­lines. The lat­est of­fi­cial data shows WMPs jumped 42 per­cent year-on-year. – Reuters

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