China’s efforts to rein in shadow banking, which contributed to the nation’s worst credit crunch in at least a decade, haven’t driven up costs for borrowers in at least one place: Wenzhou.
On June 20, as the nation’s banks demanded a record 30 percent to lend to each other for one day, small businesses in the export hub paid 23.42 percent for one-month loans from pawn shops, small lending companies and individuals, according to data from a local government-backed agency. That’s almost unchanged from this month’s average of 23.17 percent.
Stable borrowing costs in the coastal city that’s a bellwether for informal lending may support policy makers’ argument that the economy has enough financing. Premier Li Keqiang has urged banks to make better use of existing credit and the central bank has injected cash into particular lenders, rather than easing total funding, even after money-market rates jumped to a record and stocks entered a bear market.
“If you look at the growth rate of money supply or total social financing, it’s quite obvious that the economy isn’t short of liquidity,” said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp. “It’s just not where it should be.”
Regulators are seeking to halt Chinese banks’ increased use of interbank borrowing and short-term deposits known as wealth management products to finance long-term loans and investment in trusts, some of which are held off-balance sheets. The crackdown may damage the economy by shrinking the non-bank funding that smaller companies rely on, Barclays Plc said on May 20.
China’s aggregate financing, which tallies bank loans, corporate bonds, equity raising and other off-balance-sheet credit to provide a broad picture of funding, surged 50 percent in the first five months to a record 9.1 trillion yuan ($1.5 trillion), the central bank said this month. About a third of that went to entrusted loans, trust lending and bills, which together with underground lending are known as shadow banking.
Shadow lending flourishes in China because an estimated 97 percent of the nation’s 42 million small businesses can’t get bank loans, according to Citic Securities Co., and savers are seeking higher returns than banks pay on deposits. The industry may be valued at 36 trillion yuan, or 69 percent of gross domestic product, JPMorgan Chase & Co. estimated last month.
China last year picked Wenzhou, a city of 9 million residents and 400,000 small businesses, for a pilot program to curb informal lending after more than 80 businessmen committed suicide or declared bankruptcy over six months. The Wenzhou Private Lending Registration Center, the first in the country to monitor underground loans, matches borrowers with lenders and tracks data from 350 sources.
The weighted average lending rate for loans from one month to one year in Wenzhou, whose entrepreneurs make products ranging from cigarette lighters to eyewear, stood at 15.6 percent in the week ended June 21, down from a five-week high of 17.2 percent for the previous seven days, according to the registration center.
While smaller manufacturers and businesses have been relatively unscathed by the liquidity crunch, Michael Shaoul, chairman of Marketfield Asset Management LLC says regulators’ efforts to rein in credit will tighten financing for real estate projects.
“The bull’s eye is on the Chinese housing market and the Chinese construction industry,” Shaoul said in an interview on Bloomberg TV today. “When a central bank really starts to address excess credit creation in an economy, it’s always the sector which has done the best which suffers the most.”
New home prices in Beijing, Shanghai and Guangzhou posted the biggest gains in May since at least January 2011, as 69 of the 70 cities tracked by the government showed increases last month, the most since August 2011, according to the statistics bureau.
Total liquidity in China’s banking system is “reasonable,” the People’s Bank of China said in a statement dated June 17 and published June 24. Money-market rates are fluctuating because of rapid loan growth, the demand for cash during a public holiday this month, companies making tax payments and banks meeting mandatory reserve requirements, the central bank said yesterday.
Regulators are requiring trust funds and sellers of wealth management products -- financial instruments used by banks to collect deposits for periods from 30 days to a year -- to shift assets into publicly traded securities, tightening funding for property developers and local-government financing vehicles.
The China Banking Regulatory Commission in March told banks to cap investments of client money in debt that isn’t publicly traded at 35 percent of all funds raised from the sale of wealth management products.
The squeeze on the interbank market is “emblematic of some of the shadow banking issues coming to the fore as well as some of the tight liquidity associated with wealth management product issuance, and the crackdown on some shadow channels,” Charlene Chu, a Beijing-based analyst at Fitch Ratings, said on June 18 in an interview with Bloomberg TV.
The outstanding amount of wealth management products rose by 500 billion yuan to 13 trillion yuan in the first five months of this year, accounting for 16 percent of the nation’s deposits, according to estimates published by Fitch on June 10. Such products increased by 4 trillion yuan last year, the ratings company said.
“What you will see happening from this point on is, the amount of total social financing starts to decelerate very quickly in China,” Marketfield’s Shaoul told Bloomberg TV’s Zeb Eckert. “The effect of this change in policy is going to be fairly dramatic in the next few months.”