China to reduce shadow banking

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