China's addiction to bank lending just got worse

The good news is that shadow lending is tapering off in China. The bad news is that traditional bank loans picked up right where the shadow lenders left off.

At first blush that sounds like a positive stroke for regulators: a portion of opaque funds that banks pooled off their balance sheets have been brought back on to the books. By most accounts, it is a victory for assessing China's mounting credit risks under the pressure of sputtering economic growth.

But the changing composition of the mainland finance sector is a painful reminder that the banking sector is the bearer of too much risk and that bank loans are far too dominant as a channel for finance. Nevertheless, banks' balance sheets are only set to bulge this year as Beijing halts public offerings and uses commercial lenders to funnel trillions of yuan to the stock market.

"The changing dynamics in total social financing reflect an intensification of government support to the economy, as the most direct channel of monetary stimulus is still bank lending," Yao Aidan, a senior emerging markets economist at AXA Investment Managers, told the South China Morning Post.

Shadow-bank finance stagnated in the first half of the year at about 35 per cent of gross domestic product with only slight growth on the year before, data from Moody's Investors Service showed. Bank lending, however, grew to 144 per cent of GDP during the period from about 133 per cent in 2014. Direct capital markets financing showed little growth - 26 per cent of GDP in the first half, from 24 per cent in 2014.

AXA data also showed that the banks filled much of the finance gap left by shadow banking.