China's Talking Tougher on Shadow Banking and the Data Show Why

(Bloomberg) -- China’s top banking regulator Guo Shuqing rolled out some muscular statements of intent on Wednesday, vowing that shadow banks will continue to be “dismantled” as part of a campaign against excess leverage.

To claim success on that front, he can’t afford another year like 2017, fresh data show.

The combined outstanding stock of three major categories of shadow bank assets -- trust lending, entrusted loans and banks’ acceptances -- surged by 3.57 trillion yuan ($555 billion) last year, according to calculations by Bloomberg Economics based on a People’s Bank of China release last week.

The outstanding assets of the shadow banking sector stood at 27.8 trillion yuan in December, or more than four times the size of Mexico’s economy.

"Private companies became more reliant on shadow banks for refinancing last year amid a slowdown in overall credit supply," said Fielding Chen, a Hong Kong-based China economist at Bloomberg Economics. "Officials will focus on deleveraging in the real economy in 2018. That said, cracking down on the traditional shadow banking will be a focus, resulting in slower growth of the sector."

Indeed, the authorities are already taking action this year, issuing tougher rules on entrusted loans earlier this month.

China's Talking Tougher on Shadow Banking and the Data Show Why

Progress on reining in the sector will show in the data. Indeed, there could be good news for regulators, as the breakneck pace of asset growth slowed markedly toward the end of 2017, even considering that demand for funding tends to soften toward the end of the year.

China's Talking Tougher on Shadow Banking and the Data Show Why

The biggest contribution to the increase in shadow banking came from a jump in trust loans -- made by trust companies to finance infrastructure and real estate -- the outstanding amount of which surged 35 percent last year to 8.53 trillion yuan at the end of 2017. The outstanding volume of banks’ acceptances -- short-term credit issued by a company with a bank’s guarantee -- added 14 percent following a drop in 2016. Therefore, China will likely issue rules to rein in the use of the tools in 2018, according to Chen.

"The focus for Chinese policy makers is more to reduce credit risk and improve risk management systems in shadow banks," rather than a rapid reduction in the size of the sector, said Rajiv Biswas, chief Asia-Pacific economist at IHS Markit in Singapore. "The systemic risks inherent in the shadow banking system are being gradually reined in."

©2018 Bloomberg L.P.