A heavy-handed crackdown on the lending sector by the recently appointed head of the China Banking Regulatory Commission is causing concern amongst investors about the potential impact upon Chinese stock and bond markets.
Since becoming chairman of CBRC in February Guo Shuqing has launched a regulatory campaign of unprecedented intensity, issue a string of directives in March as well hitting China’s banks with a slew of fines and administrative penalties for various forms of misconduct.
Caixin reports that the crackdown has compelled many banks to dial back their investments in other banks, as well as their exposure to bond and stock markets via asset management vehicles.
Since 2015 banks have made increasing use of asset management vehicles to acquire stakes in bonds and stocks, in a practice commonly referred to as entrusted or outsourced investment.
Citic Securities estimates that the banks made entrusted investments worth as much as 19 trillion yuan by the end of 2016.
While any cutback in entrusted investment may be good for the long-term health of China’s financial sector, it may have also had an adverse near-term effect upon stock and bond markets.
Both the Shanghai and Shenzhen exchanges have faltered in recent weeks, while bond issues worth billions of RMB have been either annulled or delayed entirely since the start of the year.
Concern that constricted bank investment is affecting stocks and bonds could also have a run-on effect, by prompting other investors to withdraw from the market in the absence of a large source of speculative funds that can serve to drive up prices.
Analysts further point out tightening entrusted investment could also cause liquidity crunches and exacerbate market volatility if improperly handled.