As China's Shadow Banking Takes a Hit, the Cash Flows Elsewhere

China’s giant shadow banking industry shrank for the first time in nine months during July -- evidence Beijing’s campaign to quash risks to the financial system may be starting to bear fruit.

At the same time, however, traditional forms of lending are seeing a renaissance. Net corporate bond issuance has been jumping as non-financial corporations opt for cheaper sources of finance than borrowing in the shadow banking sector, where costs have surged amid the government crackdown.

As China stares down a twice-a-decade leadership re-shuffle later this year, President Xi Jinping has made financial-sector stability a top priority. Regulators have been hiking short-term interest rates, reining in banks and targeting property speculators in their drive, which has pushed the cost of off-balance sheet lending higher, to the benefit of conventional borrowing.

To be sure, the slowdown in lending in July is partly seasonal. This partly explains why key indicators like industrial output and investment pulled back, while overall activity held up.

— With assistance by Enda Curran, Xiaoqing Pi, and Yinan Zhao

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