State Media Says Regulatory Crackdown Bringing Shadow Banking to Heel

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China’s state media is touting the initial successes of ongoing efforts by regulators to clean up the country’s finance sector and prevent systemic risk.

An editorial piece published by the Xinhua News Agency says that the latest slew of economic indicators vindicates recent statements by authorities concerning the initial successes of the financial sector crackdown and deleveraging campaign launched towards the end of last year.

“[We’ve] achieved preliminary success in containing market malfeasance,” said a spokesperson for the China Banking Regulatory Commission. “Market competition is beginning to trend towards rationality and business conduct is beginning to trend towards standardisation.

“Key regulatory indices for the banking sector remain stable, and risks is controllable overall,” said CBRC.

The Xinhua editorial by Li Yanxia (李延霞) points out that key measures point to a decline in shadow banking activity in the wake of intensified regulatory scrutiny.

These include the first contraction in interbank business in seven years, a drop in the growth of wealth management products to single digits, a drop in the balance of outstanding entrusted loans for the first time since 2008, and lending growth outpacing asset expansion for the first time in 2015.

According to Li China’s real economy is already deriving direct benefit from the crackdown by regulators.

“Manufacturing loans have increased for six consecutive months, and more bank capital is flowing towards the real economy,” said Li.

Li believes that the recent divergence between M2 money supply growth, which extended its historic lows in July, and growth in total social finance, which was robust last month, is another sign of the improved ability of the Chinese financial sector to service the real economy.

“Financial data released this week by the central bank indicates that in July China’s social financing and new lending maintained comparatively rapid growth, yet year-on-year M2 growth hit another new low.

“This ‘One High One Low’ data shows that on the one hand the strength of financial support for the real economy is expanding, while on the other hand the effects of financial deleveraging are beginning to show.”

While Li believes that broad monetary and credit indices are significant of nascent improvements to China’s finance system, he acknowledges that ongoing rises in the interbank lending rate and tightening liquidity are still signs of weakness.

The Shanghai Interbank Offered Rate (SHIBOR) rose across the board last week, with the overnight rate lifting from 2.7743% on Monday to 2.8355% by Friday, prompting the People’s Bank of China to release 180 billion yuan in liquidity via repo agreements and medium-term lending facilities.

While mid-month tax payments as well as the maturation of PBOC’s open market instruments served to drive capital tightness, according to Li it also “reflects to a significant extent that transactional leverage remains comparatively high at certain institutions, financing chains are comparatively weak, liquidity is tending towards tightness, and interest rate fluctuations are thus liable to amplify.”

For this reason the state news agency flags no relent in the ongoing crackdown by Chinese regulators on the finance sector for the near future.

“Monetary policy and financial regulatory policy must continue to show vigour and make accurate adjustments…chaotic phenomena aren’t formed in a single day, and correcting chaotic phenomena cannot be achieved in an instant, but require time and perseverance to succeed.

“During this process, monetary policy must both give consideration to its impact on financial markets and the real economy, while also avoiding excessive leveraging of institutions…financial regulators must also make comprehensive assessments of the impact of various policies on financial institutions and the real economy.”

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