Chinese Banking Sector Leverage Declines for the First Time This Decade

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Leverage in the Chinese banking sector has declined for the first time since the start of 2010, following concerted efforts by financial regulators to reduce burgeoning debt levels and curb shadow banking activity.

At a press conference held on Friday the China Banking Regulatory Commission revealed that interbank assets and wealth management products, both of which are key components of the shadow banking sector, posted marked declines by the end of the first half of 2017.

The balances of both interbank assets and liabilities at the end of June saw a decrease of 1.8 trillion yuan (USD$270 billion) compared to the start of the year, while outstanding wealth management products fell by 1.9 trillion yuan in total.

Chinese regulators led by the People’s Bank of China launched an aggressive deleveraging campaign towards the end of last year, in order to address with the country’s burgeoning debt levels which have soared in the decade following the Great Financial Crisis.

CBRC then stepped up its scrutiny of the banking sector at the start of April under the leadership of new chairman Guo Shuqing, with the launch of a slew of new directives to curb shadow banking activities and the issuance of multiple penalties to major lenders.

China’s entrusted investments – another key component of shadow banking that involves the channeling of funds obtained by lenders via the issuance of WMP’s to external asset managers, have since seen a decline of 530 billion yuan according to CBRC.

In April entrusted loans – a form of shadow banking in which banks mediate loans between often affiliated companies, posted their first decline since 2008, as well as saw continued declines over the two subsequent months.

Data from CBRC previously indicated that shadow bank financing contracted in July for the first time since October last year, as M2 money supply growth dropped to a historic low.

The latest data from CBRC gainsays the assertion of many China banking observers such was former Fitch Ratings analyst Charlene Chu, who claim that the deleveraging campaign is disingenuous, and is only slowing the pace of credit growth as opposed to actually dialling it down.

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