Rampant growth of shadow banking slows
Chinese banking authorities seem to be winning the battle to curb the excesses of the shadow banking industry, which is a key source of funding for the economy but one that has also added to rising debt levels and other risks.
Estimates of the industry’s size vary widely, but the latest figures based on central bank data put the value of shadow-banking products at almost 22 trillion yuan (Bt118 billion). That’s still a lot of course, but represents a relatively modest growth rate of 14 per cent, compared with 35 per cent in 2013 and 33 per cent in 2012.
Shadow banking is popular because the banking system is highly regulated, which paradoxically has led to a dangerous rise in high-yield lending outside normal bank-lending channels.
This provides credit to borrowers that don’t meet normal bank criteria, but naturally comes with higher interest rates, increasing China’s private debt levels and also encouraging high-risk projects with a greater risk of failure. The practice is not illegal, and serves a useful function in linking those who need money with those who have it at times when the formal banking industry is unable, or unwilling, to provide credit.
When I last wrote about shadow banking 10 months ago, the government had recently indicated its intent to increase its oversight of the industry, which includes informal lenders such as trust companies and leasing firms that also attract deposits from investors.
Consensus opinion suggested that shadow banking was so widespread that to prevent businesses getting funds they couldn’t get from banks would cause real problems. Definitely, there was no easy fix. Initial measures such as a pilot programme for people to register their loans had struggled to gain traction.
So what has changed to brake the industry’s growth so dramatically, especially in the second half of 2014?
One of the reasons may be that investors are shifting their cash into the rallying stock market, which has made returns on trust and wealth management less attractive.
Another is the decline in interest rates, which has made orthodox bank lending more affordable. Diminishing returns on property and infrastructure projects may be reducing the promised investment gains on the products issued by shadow banks, while there was also a recent default by a high-profile shadow lender.
While many outside China doubted the country’s ability to rein in the shadow banking industry when it became a hot issue a year or so ago, the improvement we have seen so far yet again demonstrates the unique characteristics of the Chinese economy and how it can be managed differently from the rest of the world.
With authorities having already signalled their determination to further tighten their grip on shadow banking, the industry’s growth is likely to be even more modest in 2015.
