China makes fresh bid to curb shadow banking, contain debt risk

Mon Jan 6, 2014 4:43am EST
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By Heng Xie and Gabriel Wildau

BEIJING/SHANGHAI (Reuters) - China's cabinet has published guidelines strengthening regulation of risky off-balance-sheet lending in a new effort to address growing financial risks from an explosion in debt.

The State Council's guidelines call for tighter regulation of banks' off-balance-sheet lending and say that trust companies - the biggest non-bank players in what's called "shadow banking" - should return to their original purpose as asset managers and not engage in "credit-type" business.

A copy of the council's Document 107, dated December 11, was obtained by Reuters. There's been no official confirmation of the document, which was addressed to government agencies at the central and local level.

An index of the biggest mainland stocks .CSI300 closed at its lowest level in five months on Monday, as concerns about the new regulations weighed down the market. .SS

China's policymakers are concerned that the country's economy has become overly reliant on borrowing to fuel growth and that debt-fueled investment has created massive overcapacity in many industries.

If strictly implemented, the deleveraging push could put China's economy on a more sustainable long-term path by reducing the risk of a bad-debt crisis. But short-term growth would likely fall as a reduction in credit growth spurs a fall in spending.

"One can predict that growth of total social financing will slow and fixed-asset investment will also slow," said Liu Yuhui, director of the financial focal point laboratory at the Chinese Academy of Social Sciences, a government think tank, referring to the central bank's measure of total credit from all sources.

"If this isn't accompanied by various forms of debt restructuring, some sectors may see their funding chains broken and there could be defaults," he said.   Continued...

100 Yuan notes are seen in this illustration picture in Beijing November 5, 2013. REUTERS/Jason Lee