China economy

Credit tightening in China to continue, BAML says

Bank of America Merrill Lynch says Beijing is likely to continue with its campaign to rein in the shadow banking sector and tamp down credit growth in the second half

PUBLISHED : Thursday, 22 June, 2017, 4:28pm
UPDATED : Thursday, 22 June, 2017, 10:43pm

There is more policy tightening ahead for China as authorities step up efforts to rein in the shadow banking sector, according to the chief greater China economist at Bank of America Merrill Lynch (BAML).

Shadow banking or off-balance-sheet lending, which takes place outside official banking channels, is not regulated. However, these platforms have played an important role as the go-to credit supplier for small enterprises because state-owned banks often prefer to lend to state-controlled entities.

Shadow banking assets in China grew 21 per cent in 2016 to 64.5 trillion yuan (US$9.4 trillion), equivalent to 87 per cent of gross domestic product, according to ratings agency Moody’s Investors Service.

The China Banking Regulatory Commission has unleashed a series of measures to strengthen supervision of the lending sector this year. In May, the regulator issued rules requiring banks to be more transparent about wealth management products, the single largest component of the shadow banking sector.

Beijing is concerned about mounting risks to the financial system as much of the borrowing is being used to speculate on assets rather than support the real economy.

Meanwhile, the People’s Bank of China raised a set of key short-term interest rates at the start of this year.

Helen Qiao, chief greater China economist at BAML, believes the administrative tightening measures reflect Beijing’s priority on deleveraging and cutting debt levels, adding that tightening is “far from being done”.

Qiao was speaking at a media briefing organised by the bank on Wednesday.

She said China’s debt-GDP ratio, estimated at 230 per cent, was high but still manageable and the main contributors to corporate debt were state-owned enterprises in the mining and metals industries.

Capital controls designed to regulate outbound money flows were “going to have to stay” until Beijing became “confident” about the accumulation of foreign exchange reserves, Qiao said.

The country’s foreign reserves had declined for eight consecutive months before picking up in March. At the end of May, the stockpile amounted to US$3.05 trillion.

Starting from September, all overseas cash withdrawals and transactions of more than 1,000 yuan with a Chinese bank card must be reported to the State Administration of Foreign Exchange.

The Bond Connect scheme, which allows foreigners to buy debt in China, and the inclusion of A shares in MSCI’s benchmark indices would help support capital inflows, Qiao said.

She added that it was difficult to envision China lifting capital controls in the short term.