China’s shadow banking slumps, weighing on bond and stock prices

Broad credit shrank by more than a third in April, to 1.39 trillion yuan, according to the central bank

PUBLISHED : Saturday, 13 May, 2017, 12:16am
UPDATED : Saturday, 13 May, 2017, 12:16am

China’s push to root out financial irregularities and curb excessive borrowing led to a big slump in shadow banking activities last month, a development that could translate into more pain for the country’s bond and stock investors.

Aggregate financing – the measure of broad credit – shrank by more than a third, to 1.39 trillion yuan (US$200 billion or HK$1.57 trillion) in April, down from 2.12 trillion yuan in March, the Peoples’ Bank of China said on Friday. New yuan loans, the traditional form of financing, rose to 1.1 trillion yuan, from 1.02 trillion yuan a month earlier.

China’s crackdown on shadow banking could seriously upset global markets

While the Chinese government is trying to walk a fine line between ensuring sufficient funding for economic growth and cutting leverage in the financial sector, it is becoming less tolerant of murky financial arrangements that channel liquidity released from the central bank into speculative investment.

A clean-up campaign by regulators, along with an increasingly hawkish policy stance at the People’s Bank of China, has resulted in a seven-week fall in the 10-year government bond yield, the longest decline since 2013.

Meanwhile, the stock market has remained week in recent weeks with the benchmark Shanghai composite index falling close to the important psychological level of 3,000.

Raymond Yeung, ANZ’s chief economist for Greater China, said banks had rushed to lend in April on the expectation of further tightening, but levels were likely to ease this month and next.

The growth of M2 – the broad measure of money supply – slowed to 10.5 per cent in April from 10.6 per cent a month earlier. It is much lower than the full-year target of 12 per cent, showing the central bank’s preference for liquidity tightening.

In its quarterly monetary policy report, the central bank said it was not deliberately “shrinking the central bank balance sheet” as part of tightening efforts. But the bank would try to strike a balance between “deleveraging and liquidity stability”.

China is facing a difficult task of defusing debt bombs after a decade of monetary easing and expan

sion of the financial industry. The nation can’t afford to loosen monetary policy as it will add pressure to capital outflow and yuan depreciation, especially when the US Federal Reserve is raising interest rates. At the same time, Beijing can’t move hastily in reducing liquidity as that could trigger market turmoil.

Shadow banking makes a surprise return to China

Zhao Hongyan, an economist at Huatai Financial Holdings in Hong Kong, said Beijing’s monetary authority would not go extreme lengths with its tightening policy.

“The central bank may have some temporarily adjustments when stock and bond markets face downward pressure, as seen from the medium-term lending facilities’ renewal today,” Zhao said.

The central bank put 459 billion yuan into the banking system via the medium-term lending facility (MLF) on Friday, and the amount of credit will be more than enough for banks to cover some MLF loans that matured last week and some set to mature next week.

The move helped the stock market index gain 0.72 per cent.

But the central bank skipped daily open market operations on Friday, marking the fifth day in two weeks that it declined to inject short-term liquidity into the interbank market via its usual route. In April, it skipped open market operations for 13 straight days.