Property, manufacturing woes help trim China's shadow banking

Sun Nov 23, 2014 4:14pm EST
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By Engen Tham and Jake Spring

SHANGHAI/BEIJING (Reuters) - A bid by China to rein in its "shadow banking" activity is producing results, thanks to slowing economic growth and tighter regulation.

But some success for a policy drive to curb risky lending is not all good news for Beijing, as smaller companies may face even bigger struggles to find funding. A cut in interest rates, announced by Beijing on Friday, is unlikely to help them much.

Shadow banking includes off-balance-sheet forms of bank finance plus lending by non-traditional institutions, all of which is less regulated than formal lending and thus considered riskier.

At the end of 2013, China had the world's third-largest shadow banking sector, according to the Financial Stability Board, a task force set up by the G20 economies. It estimated that Chinese assets of "other financial intermediaries" than traditional ones were then just under $3 trillion.

In the three months ended Sept. 30, the shadow banking portion of what China calls total social financing - a broad measure of liquidity in the economy - contracted for the first time on a quarterly basis since the 2008/09 financial crisis.

Loans extended by trust companies fell by roughly 100 billion yuan ($16.33 billion). Bankers' acceptances, a short-term method of financing regularly used by manufacturers, dropped 668.3 billion yuan, according to Reuters calculations based on central bank data.

October lending data, released last week, showed further contractions in these types of shadow banking.

Bankers' acceptances and trust loans "fall into categories that have been squeezed by tightening regulations in the last few months, so it's an ongoing trend," said Donna Kwok, an economist at UBS in Hong Kong.   Continued...

One Chinese yuan coins are seen in this photo illustration taken in Shanghai April 7, 2013. REUTERS/Carlos Barria