Bloomberg News

China Signals Intent to Curtail Shadow Banking, Barclays Says

January 09, 2012

Jan. 9 (Bloomberg) -- China’s leaders signaled their intent to discourage unregulated lending at a once-in-five years financial work meeting, a move that will benefit banks and capital markets, according to Barclays Capital Inc.

“One key message was that financial services should closely serve the real economy,” even though detailed policies weren’t immediately announced, May Yan, a Hong Kong-based analyst at Barclays, said in an e-mailed report today. “We expect that irregular lending and shadow banking are likely to be rectified. Funding in these markets may flow back to the financial system and be regulated to support the real economy.”

Premier Wen Jiabao told officials who attended the two-day meeting in Beijing that China will “decisively” prohibit capital from leaving the real economy for speculative activity and also ease funding for businesses. China’s informal lending market, which may have expanded to almost 4 trillion yuan ($633 billion), is the most immediate “time bomb” facing the economy, Credit Suisse Group AG said in September.

Regulators have increased their scrutiny of non-bank lending on concern that slowing economic growth and borrowing costs that exceed bank rates will erode the ability of small businesses to repay money owed to private lenders. A Xinhua News Agency report in September said that more than 80 businessmen in the city of Wenzhou had disappeared, committed suicide or declared bankruptcy to avoid repaying debts to informal lenders since April.

Municipal Bonds

China may focus new initiatives on supporting small companies, lowering the entry barriers for private capital in the financial industry, enhancing coordination among regulators and accelerating the growth of the debt and stock markets, Yan of Barclays wrote. Quicker development of the municipal bond market will improve local authorities’ ability to repay bank loans, while the establishment of a unified credit information platform would help lenders’ risk management, she said.

In addition, the government’s pledge in a Jan. 7 statement following the meeting to “boost confidence in the stock market” shows policymakers have reached the “bottom” of their tolerance for stock-market declines, Lu Zhengwei, the Shanghai- based chief economist at Industrial Bank Co., said yesterday.

Wen’s comments during the meeting on improving rules regarding stock sales, delisting and dividends was “encouraging,” Lu wrote in a report. “Whether a real bottom of the market will appear immediately still depends on specific measures that follow up and the implementation.”

Separately, China Banking Regulatory Commission Chairman Shang Fulin said in an interview with the official Xinhua News Agency after the meeting that the regulator will urge lenders to build “firewalls” separating them from illegal fundraising, usury and private lending, and will further regulate their wealth-management operations. The report didn’t provide details.

--Editors: Chitra Somayaji, John Liu

To contact Bloomberg News staff on this story: Zhang Dingmin in Beijing at dzhang14@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net


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