The nation’s officials are trying to encourage spending, but the Chinese credit system may need a shake-up to make money flow more freely.
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China’s gummed-up credit system is threatening economic growth and officials may have little choice but to let unregulated lenders step in.
The nation’s economy is not in desperate straits yet, but confidence appears shaken. The economy expanded 6.5 percent in the third quarter of 2018, missing expectations. Other indicators have suffered too: Fixed-asset investment growth has seen record lows, and retail sales have cooled.
Officials have pushed for fiscal support — such as infrastructure spending — and have dropped unsubtle hints about easing the nation’s deleveraging campaign. They have also suggested that banks lend more to small businesses.
Unfortunately, China’s banking system has a big transmission issue when it comes to offering credit to smaller borrowers. At the same time the country’s correcting stock markets make it harder for private companies to raise funds via equity, or borrow using pledge shares. Bond issuance is difficult, too.
Lending data for September showed that total social financing, a homegrown measure of total credit flow, increased to $320 billion, up almost 20 percent year-on-year. But when methodological changes are stripped out, aggregate lending grew only 10.6 percent — mostly from conventional loans.
The problem is the weakness of so-called shadow banking — where money is provided by unregulated lenders — in China. The practice has been heavily constricted by new regulations: Two of the most important categories, new entrusted and trust loans, shrank by a combined 234 billion renminbi, or about $34 billion, in September, having contracted by 190 billion renminbi in August, according to calculations by the economist Ting Lu of Nomura.
It is only a matter of time before policymakers are forced to loosen up. There is no question that China’s shadow banking industry had become a place to hide a lot of poor quality loans, and officials will need to keep cleaning it up. But they cannot afford to turn it off. The shadow banking industry also functions as an efficient allocator of credit, and reviving instruments like short-term commercial paper — in particular banker’s acceptance notes — could help with quick liquidity.
If economic performance continues to wobble, shadow bankers will through necessity become part of the solution — not the problem.
