Shadow Banking Crackdown Shrinks Interbank Lending and Wealth Management Products


Little more than six months after taking the top position with the China Banking Regulatory Commission, Guo Shuqing’s crackdown on the financial sector appears to be effectively curbing certain key forms of shadow banking business.

Guo took office as the chair of CBRC towards the end of February this year, and has since ratcheted up scrutiny of the banking sector, as well as launched a crackdown on lenders that China’s domestic media has frequently referred to as a “storm.”

Examination of the first half results of China’s listed bankers would indicate that just over six months into his tenure as CBRC chief, Guo has managed to significant clamp down on key segments of the shadow banking sector, chief amongst them interbank lending and wealth management products.

Time Weekly reports that interbank lending and WMP’s of listed Chinese banks saw their first contraction in seven years in the first half of 2017.

Interbank lending, primarily in the form of certificates of deposit between banks, has been a keen source of concern for regulators, given rapid growth amongst smaller lenders who are finding it difficult to obtains deposits, and its ability to obscure the final destination of funds.

Interbank lending was one of the focal points of the flurry of new directives issued by CBRC in the second quarter, with Document 6 requiring that banks adopt effective measures to reduce their reliance on interbank CD’s and other forms of interbank financing.

According to Time Weekly this regulatory focus has resulted in substantive declines to the interbank financing of major commercial and regional banks, including Bank of Nanjing, China Merchants Bank, Hua Xia Bank and Wuxi Rural Commercial Bank.

CBRC official Xiao Yuanqi previously indicated in mid-August that the scale of both interbank assets and debts had contracted for the first time since 2010 in the first half, following a protracted period of continuous growth.

As of the end of the second quarter the commercial bank interbank asset balance and interbank debt balance had fallen by 1.8 trillion yuan compared to the first quarter.

“The decline in interbank business is primary due to the launch of macro-prudential regulations by CBRC in the first half,” said one head of a commercial bank branch to Time Weekly. 

“Interbank deposit cannot exceed 1/3 of total deposits, and major banks have all reduced their interbank ratios.”

As consequence both profits as well as liquidity pressure on lenders has seen an increase – especially for joint-stock banks and small-to-medium municipal banks.

“Interbank business can swiftly expand asset scale, and many joint-stock banks had previously used interbank business for rapid growth,” said another source.

“With regulators strictly controlling the scale of interbank business, however, this method is no  longer viable, and some banks have seen their balance sheets contract as a result of declines in interbank business during the first half.”

In addition to interbank CD’s, WMP’s have also taken a hit as a result of CBRC’s regulatory crackdown.

According to Xiao Yuanqi, since the launch of efforts to clean up the banking sector their WMP balance has fallen by 1.9 trillion yuan in total, to 28.4 trillion yuan by the end of June.

The extension of credit to the property market has also declined, with new real estate loans declining significantly as a percentage of the total.

New personal residential mortgage loans comprised 25.1%  of all new lending in the first half, for a decline of 10.9 percentage points compared to the same period last year, and 19.9 percentage points compared to the peak scaled in the second half of 2016.

“Our branch has strictly controlled real estate lending ratios this year,” said an executive from one commercial bank in southern China to Time Weekly. 

“New loans are not generally permitted for real estate developers…two of the top ten real estate companies may have a need for loans, but we are unable to extend them because this would exceed the limits for our bank.

“We have integrated loan controls, and property cannot exceed 30%.”