A new analysis claims that President XI Jinping has used his heightened powers to effectively contain the Chinese shadow banking sector and bring an end to the “lending bubble” that emerged in the wake of the Great Financial Crisis.
Paul Hodges and Daniël de Blocq van Scheltinga, publishers of The pH Report, say that China’s shadow banking sector has entered its “end-game” since the start of 2018, with a year-on-year plunge of 64% in renminbi terms for the January-April period.
According to Hodges and de Blocq Van Scheltinga the sharp decline in shadow banking marks the end of the Chinese “lending bubble” which kicked off in the wake of the Great Financial Crisis, when Beijing adopted strenuous stimulus measures to keep the economy afloat.
“China’s lending bubble is now history and the tide of capital flows is reversing,” they write in The Financial Times.
While total social financing (TSF), a metric encompassing all forms of private credit extension in the Chinese economy, was on average two times China’s GDP during the period from 2002 to 2008, it surged to 3.2 times GDP during the period from 2009 to 2013.
China’s stimulus program managed to keep the economy growing following the financial crisis, but it also contributed to a real estate bubble that has driven house price-to-earnings ratios in first tier Chinese cities to some of the world’s highest levels.
Hodges and de Blocq Van Scheltinga say this all began to change once Xi Jinping took office, with shadow banking’s share of TSF steadily declining from almost 50% in 2013 to a mere 15% by April, and TSF dropping to 2.4 times GDP.
In their view Xi’s efforts to crack down on shadow banking and curb China’s lending bubble will be further expedited by his shoring up of personal authority within the political system.
“The start of Mr Xi’s second term has seen him in effect take charge of the economy through the mechanism of his central leading groups,” the pH Report authors write.
“He has also been able to place his supporters in key positions to help ensure alignment as the policy changes are rolled out.
“This year’s lending data are therefore likely to set a precedent for the future, rather than being a one-off blip.
“Mr Xi is now China’s most powerful leader since Mao, and it would seem unwise to bet against him succeeding with his deleveraging objective, even if it does create short-term pain for the economy as shadow banking is brought back under control.”
Xi’s deleveraging campaign will nonetheless confront many challenges and perils moving ahead, chief amongst them the close ties between China’s official 250 trillion yuan banking sector and shadow banking activity, leaving the former exposed to 75 trillion yuan in off-balance-sheeet investment vehicles.
Beijing is already adopting measures to deal with these issues, with the merger of the separate banking and insurance authorities into the China Banking and Insurance Regulatory Commission helping to stamp out “regulatory arbitrage,” and Chinese banks now under pressure to expand their capital base.
