China reins in shadow banking as leaders meet to set policy

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Passengers on a ferry look at buildings in the Lujiazui district at dusk in Shanghai. Slower credit would constrain growth while limiting risks of a financial crisis as China seeks a way to replace the debt-fueled investment and construction that have sustained expansion since the global financial crisis in 2008. Photo: Bloomberg

China's broadest measure of new credit fell by more than estimated in October, suggesting authorities are trying to keep shadow-finance risks in check as leaders map out a blueprint to sustain growth.

Aggregate financing was 856.4 billion yuan ($140.6 billion), the People's Bank of China said yesterday in Beijing, below all nine projections in a Bloomberg News survey. New local-currency loans of 506.1 billion yuan compared with the 580 billion yuan median estimate of analysts. M2, the broadest measure of money supply, rose 14.3 percent from a year earlier.

Slower credit would constrain growth while limiting risks of a financial crisis as China seeks a way to replace the debt-fueled investment and construction that have sustained expansion since the global financial crisis in 2008. President Xi Jinpingand top Communist leaders today conclude a four-day gathering to set the direction of economic reforms.

"This confirms our view that monetary policy has tightened and growth will slow going forward," said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. With GDP expansion on track to achieve the 2013 goal of 7.5 percent, new bank loans and aggregate financing will decline this quarter from the previous period's "high levels," Zhang said.

The data were released after the close of China's stock markets. The benchmark Shanghai Composite Index (SHCOMP) rose 0.2 percent, the first gain in four days.

Factory production

Even as credit growth slows, a revival in the real-estate market has seen developers' sales of dollar bonds more than double this year, according to a report by Moody's Investors Service. Such companies sold $17.88 billion of the notes as of Oct. 20, up from about $8 billion for the whole of 2012.

The below-forecast loans and credit contrast with gains in housing prices, industrial production and exports.

Aggregate-financing projections ranged from 1 trillion yuan to 1.35 trillion yuan, with a median of 1.115 trillion yuan, following 1.4 trillion yuan the previous month and 1.29 trillion yuan in October 2012. Estimates for new yuan loans ranged from 420 billion yuan to 870 billion yuan, after lending totaled 787 billion yuan in September.

Limiting debt

Money supply rose 14.2 percent in September from a year earlier and was projected to advance 14.2 percent in October, according to the median estimate of economists.

There are signals that authorities want to limit debt. The central bank said in a report last week that the economy "may see a decline in leverage" over a relatively long period, a suggestion that UBS AG said hadn't been previously mentioned by a government economic agency.

Premier Li Keqiang said in remarks published last week that "there's a lot of money in the "˜pool' and issuing more money may lead to inflation," citing the nation's outstanding M2 money supply of more than 100 trillion yuan ($16 trillion) as of March, about double GDP.

The credit data indicate that initiatives by the China Banking Regulatory Commission and PBOC "to contain rampant shadow banking growth appear to have worked," said Liu Li-Gang, chiefGreater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong.

"The PBOC also faces a dilemma, that is, if it tightens domestic credit conditions, the money market rates will rise further, leading to higher funding costs for firms," Liu said.

Liquidity crunch

October's numbers reflect in part a liquidity crunch during the month, Haitong International Securities Group said. Amid signs of potential tightening, the benchmark seven-day repurchaserate climbed 85 basis points to 5.05 percent in October, helping derail a stock market rally and driving the one-year government bond yield to a record high.

In June, the Shanghai share index sank 7.7 percent after the repo rate touched an all-time high of 10.77 percent.

The October aggregate-financing figure was the second-lowest this year, after July's 818.9 billion yuan. New local-currency loans from banks accounted for 59 percent of the total, the highest proportion in three months. Trust loans, one of the categories associated with shadow banking, totaled 40.4 billion yuan, the lowest since July 2012.

"We have for a while expected the government to pursue a firmer overall monetary stance in order to rein in overall credit growth," Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, said in a note. While August and September figures "seemed to call into question the government's resolve" in implementing such a policy, the October credit numbers "point quite clearly to a firmer stance," Kuijs said.

Bad loans

China's top four banks posted their biggest increase in soured loans since at least 2010 in the third quarter as a five-year credit spree left companies with excess manufacturing capacity and slower profit growth amid a cooling economy.

Bad debts at Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. rose 3.5 percent in the third quarter to a combined 329.4 billion yuan, data compiled from earnings reports showed.

The State Council in July ordered the most comprehensive audit of government debt in two years. Standard Chartered Plc estimates regional borrowing has increased since 2010 to as much as 24.4 trillion yuan.

JPMorgan Chase & Co. says China today and Japan in the 1980s, ahead of its lost decades, share a buildup in broad measures of credit to almost double the economy's size. Goldman Sachs Group Inc., in a July report, drew a comparison to what preceded the Asian financial crisis of 1997-98.

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