So far, 2014 has been a bad year for off-balance-sheet lending in China. It began with a mild cash crunch that targeted the short-term lending rates shadow banks thrive on. Before the end of January, a trust product came to the edge of default, sending a chill through the risk-laden market.
Interbank rates have since subsided, hitting a 20-month low last week. The moribund trust product issued by China Credit Trust got a mysterious bailout facilitated through Industrial and Commercial Bank of China, the same bank that sold the product, narrowly avoiding a default.
Still, the turbulence at the beginning of the year was enough to significantly reduce new lending in February. Total Social Financing, or TSF, China’s broadest measure of credit, fell to RMB939 billion last month from RMB1.7 trillion a year ago, according to figures released this week by the People’s Bank of China. After a huge surge in lending in January amounting to RMB2.58 trillion, analysts had projected RMB1.31 trillion in new loans last month. The drop came as a surprise, accompanying poor trade data for February.
Unlike the export numbers, the falling TSF data isn’t disappointing. In fact, it could be encouraging.
Much has changed during the first two months of the year. In January, seasonal factors partially led to the high TSF numbers. But off-balance-sheet lending was the driving force in the surge, worrying regulators that their attempts to crack down on the shadow sector were failing.
In contrast, weak off-balance-sheet lending pushed the numbers to the floor in February. Non-bank finance constituted just 17% of TSF last month, a remarkable decline from a year ago, when it accounted for more than 42%. In January, off-balance-sheet credit hit 43% of TSF, a share that grew from the month before.
This is a promising trend. And it shows that a new sense of risk is taking hold in China’s thriving shadow lending sector.
In January, the near default of China Credit Trust knocked confidence and pushed down volumes in trust loans, one of the three primary types of non-bank finance. But much of that lending reappeared in the other two areas – entrusted loans and banker acceptances. They both surged in January, showing a still-strong demand for shadow banking products.
The February data show all three types of non-bank credit are in retreat. At the start of the year, when interest rates were much higher, corporations may have used banker acceptances as a channel for finance. Now that those rates have fallen thanks to an easing policy stance at the central bank, some corporates have gone back to bank loans.
The market for trust products looks gloomy. Big banks are trying to distance themselves from those, and at the same time investors have likely wizened up to the risks, Societe Generale, a French bank, said in a report this week. “Whichever the case, the near-term prospect for trust financing is not beautiful.”
But with the central bank continuing to intervene in currency markets, pushing interbank rates down, don’t expect shadow banking to stay tame forever. The lower the cost of borrowing, the more likely shadow financing is to pick up.
“If the People’s Bank keeps this up, then looser monetary conditions are likely to support a rebound in credit growth in the shadow banking sector,” London-based Capital Economics noted in a report.
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