Shadow banking in China appears to have made a roaring comeback

[LONDON] Time to don the tin hats?

Chinese shadow-banking activity registered a surprise jump in November, throwing into sharp relief how policy makers are struggling to make good on their vow to rein in the runaway loan growth that threatens the stability of the financial sector.

Often cast as one of the weakest links in the global financial system given the potential threat it poses to Asia's largest economy, shadow credit - which consists of trust loans, entrusted loans and bank-acceptance bills - rose sharply to 479 billion yuan (S$99 billion), after having dropped to 55 billion yuan in October.

The surprise rebound may be a reaction to expectations for continuing yuan weakness as companies look to increase their local-currency liabilities at the expense of dollar-denominated obligations.

"Today's surprising data will likely trigger some regulatory concerns," David Qu, China economist at Australia & New Zealand Banking Group Ltd, wrote in a note to clients on Wednesday, citing the size and opacity of off-balance sheet lending from trust companies, brokerages, micro-lenders, pawn-shops and even real-estate companies.

The rise could reflect "short-term speculation due to expectations of renminbi depreciation and producer-price inflation," analysts at Nomura Holdings Inc, led by Zhao Yang, wrote in a report on Wednesday.

Efforts to curtail shadow lending may exacerbate this month's liquidity squeeze, as the yield on 10-year government bonds shoots up to 3.24 per cent from 2.74 per cent at the end of October - their highest level in more than a year.

"If Chinese regulators start to restrict shadow banking activities, there may be spillover effects to the bond market due to liquidity tightening," Mr Qu adds, referring to the prospect that redemptions from wealth-management funds would force asset managers to trim their bond positions.

Last month's credit binge wasn't confined to the shadow financial system.

Total social finance, the broadest measure of new lending, expanded the most since March at 1.74 trillion yuan, up from 896.3 billion yuan in October.

While TSF data can be volatile, and there's typically a month-on-month bounce given the October holidays, the rise was notably above median expectations of 1.1 trillion yuan, according to a Bloomberg survey. The 11.8 per cent increase on a year-on-year basis was driven by household lending growth, reflecting how property curbs have yet to kick in, as well as expansion in the shadow-banking sector.

"Seven months after the People's Daily called time on the credit binge, the data suggest that little progress has been made," Tom Orlik, analyst at Bloomberg Intelligence, wrote in a note to clients.

Still, the rise in shadow credits last month may prove short-lived, amid a likely crackdown by Beijing, according to Barclays Bank Plc.

"We expect this rebound in off-balance-sheet lending to be transitory given the PBOC's plan to strengthen oversight of commercial banks' off-balance-sheet wealth management products," China analysts, led by Jian Chang, wrote in a note.

BLOOMBERG