Deep in the Data, China's Bank Funding Squeeze Is Easing Off

(Bloomberg) -- China’s beleaguered private companies may be on the cusp of better times, with signs emerging that a government push to boost bank lending is working.

The private sector, which makes up about 80 percent of employment in the world’s second-biggest economy, has been struggling with a credit squeeze triggered by a campaign to shrink China’s shadow-banking industry. With corporate defaults hitting a record this year, policy makers acted to restart the credit flow, notably by verbally directing banks to provide more loans.

Here’s a look at data that suggest the worst may be over for private firms.

Some older shadow-bank credit is migrating back to the balance sheets of official lenders, a sign that at least some credit wrung out by the government’s financial cleanup is being replaced or relocated.

Loans to small businesses rose on a quarterly basis in the most recent three-month period, the first increase in a year.

Amid the government’s multi-year effort to curb excessive credit, growth in banks’ assets dropped below the nominal growth of the economy. Recent data suggest that the trend is easing if not reversing.

It’s difficult to see private-sector funding costs directly, but one available proxy suggests that borrowing rates have stabilized. While still higher than the overall average, annualized interest rates for borrowing from the non-bank sector are falling in Wenzhou in Zhejiang province. Zhejiang’s economy is one of the most privately-held in China.

The spread between the central bank’s benchmark rate and actual borrowing costs are edging down after hitting record highs, suggesting that policies to lower rates are starting to have an effect.

The percentage of loans made at rates higher than the benchmark is also starting to come down from its record high.

“With monetary easing now underway, credit growth has stopped decelerating,” said Logan Wright, director of China markets research at Rhodium Group in Hong Kong. “Softness in the housing market is likely to see an increasing share of credit channeled to corporates, including private sector firms, in the next few quarters.”

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