China’s crackdown on borrowing by local governments is forcing state-run entities take loans from non-bank lenders, reports Bloomberg. With even some of the wealthiest provinces involved, the trend is increasing risk in an opaque corner of the financial system.
The borrowing marks a return of China’s shadow-banking market, which is more loosely regulated than traditional lenders and had been reined in over the past few years in a bid to reduce risk. Since September, industrial investment arms and financing platforms owned by local governments in provinces including Shandong had borrowed billions of dollars in total from trust companies and leasing firms, according to sources.
The rates charged were 8% or higher—more than triple the cost of borrowing in the bond market, the sources said. Financial institutions that make up China’s shadow banking system are willing to extend the funding partly because they’re short of assets in a low-rate environment. As interest payments pile up and with expenses of settling the cost of projects coming due in the fourth quarter, the firms have little choice but to refinance at higher rates to keep their businesses running and avert default.