China bank survey: The return of shadow banking

China bank survey: The return of shadow banking

Andrew Collier |

Conclusion

Beijing is returning to stimulus to prevent a decline of GDP at a time of the threat from the Trade War. We see this growth in lending, both on and off balance sheet, in our October bank survey. One policy that has been surprisingly effective is the increase in lending to small businesses, a key driver of employment and economic growth. We plan to follow up with further analysis of the implications of the data.

Key points

China’s ongoing economic slowdown has increased stress on banks as they are under pressure to reduce off- balance-sheet financing while increasing support for small businesses, both of which carry considerable credit risks. To find out how banks are faring amid policy shifts, we spoke to 15 banks in 10 cities during the second week of October. These comprised seven state banks, four joint-stock commercial banks, and four local and city banks.

Here are some key points:

1. Many banks are reducing the pace of sales of off-balance-sheet assets because they are under less pressure from regulators to reduce leverage.
2. Lending to real estate and infrastructure companies is tapering off because of concerns of credit risks among debt-laden local governments and real estate developers.
3. Infrastructure investment is likely to increase due to the growth of loans through Public Private Partnerships.
4. Small business loans are gaining in popularity thanks to policy support, but structural problems such as a lack of collateral could weaken the current growth in lending to SMEs.
5. Bad debt risks are still under control. Yet they could increase in the coming months as banks began moving off-balance-sheet assets, a large portion of which could go default, back to their books.