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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 last year, the mainland had the world's third-largest shadow banking sector, according to the Financial Stability Board, a task force set up by the Group of 20 economies.
It estimated mainland assets of "other financial intermediaries" than traditional ones were then just under US$3 trillion.
In the three months to September, the shadow banking portion of what the mainland 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 global financial crisis.
Loans extended by trust companies fell by about 100 billion yuan (HK$126.6 billion). Bankers' acceptances, a short-term method of financing regularly used by manufacturers, dropped 668.3 billion yuan, according to calculations based on data from the central bank.
Lending data for last month, 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 past few months, so it's an ongoing trend," said Donna Kwok, an economist at UBS.
Trusts have grown more risk-averse as regulations tighten, hampering growth. Rules issued in April by the China Banking Regulatory Commission hold officers personally accountable for irresponsible lending and require shareholders to inject capital and liquidity when necessary.
Cissy Sun, a risk manager at Anxin Trust, said the industry had been hit by regulations prohibiting trusts from using pooled funding.
Previously, funds in a trust collected from investors buying different products were packaged into loans for a property developer or other borrower.
Trust companies had cut investment in property as its profitability had fallen, Sun said. The mainland's housing prices suffered their biggest annual decline in nearly four years last month.
Making loans to sectors other than real estate would be slowed by the need to learn a different set of industry regulations, Sun said.
Bankers' acceptances have contracted as a result of the slowdown in the manufacturing sector and tighter regulations.
The mainland's factory output growth hit a six-year low in August, rebounding only slightly since then.
In half-year reports, mainland banks said non-performing loans for manufacturing increased.
Lending to small and medium-sized manufacturers has been tightened due to worries about defaults, according to a banker who oversees issuance of acceptance notes for a big mainland bank.
Bankers' acceptances used to be short-term tools for commercial lenders to shore up deposits to meet targets.
But in 2011, the mainland's banking regulator changed accounting rules, so cash collected through acceptances could no longer boost deposits. As a result, acceptances fell from favour, bankers said.
For Beijing, curbing risky forms of lending might undercut a stated goal of expanding lending to small and medium-sized enterprises.
Major banks often avoid lending to smaller companies, preferring to have state-owned enterprises as borrowers. However, the central government recognises that innovative SMEs will be drivers of the economy and a primary source for job growth in the future.
"We can't just say 'no' to shadow banks because to some extent, they satisfy some financing demands of a diversified economy," Xinhua quoted Hu Xiaolian, a deputy governor of the central bank, as saying in September.
Reuters


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Banking & Finance

While tighter regulation succeeds in reducing risky lending, smaller enterprises may struggle to find funding despite a cut in interest rates


A bid by China to rein in its shadow banking activity is producing results, thanks to slowing economic growth and tighter regulation.


.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}While tighter regulation succeeds in reducing risky lending, smaller enterprises may struggle to find funding despite a cut in interest rates

While tighter regulation succeeds in reducing risky lending, smaller enterprises may struggle to find funding despite a cut in interest rates