China’s Economic Growth Slows, Shadow Lending Grows

Analysts suggest that the increase in the mean bank loan interest rate from 6.95 percent to 7.47 percent may be a factor behind this trend, as well as the lackluster performance of the retail sector, which reflects consumer confidence. While up to half of the bankers surveyed by CBB reported an increase in loans to business, only one percent confirmed that 30 percent or more of their business was conducted with new borrowers, the balance being debt rollovers or increases to existing customers, indicating a lack of expansion.

So called ‘shadow lending’, the providing of loans through non-bank financial intermediaries, rose to 31 percent in the last quarter and is likely to keep growing. While bank lending retains the highest market share of loans business, alternative financiers, including trusts, credit-guarantee firms, leasing companies and money-market funds, are gaining ground. Many of these lenders are respectable businesses offering an above-board service, but are included in the term ‘shadow lending’ because they are not banks. It should be noted that trusts are regulated by the China Banking Regulatory Commission (CBRC) which also supervises China’s banks. However, some shadow lenders bend the rules on how much they can lend, what rates to charge and who to lend to. Shadow lenders raise money from businesses by offering higher returns than those offered by banks, then charge lenders even higher rates. Many of these lenders are unable to borrow from banks because of being in industries subject to overinvestment restrictions imposed by authorities.