BEIJING/SHANGHAI (Reuters) - China's cabinet has issued new guidelines to strengthen regulation of the shadow-bank lending that has helped fuel an explosion in debt levels since 2008, in the latest effort to address growing financial risks, sources told Reuters on Monday.
China's policymakers are increasingly concerned that unsustainable debt growth poses a threat to the economy. Analysts say the new guidelines from the State Council, China's cabinet, signal the government's sharpening focus on pushing deleveraging across the economy.
"One can predict that growth of total social financing will slow and fixed-asset investment will also slow," said Liu Yuhui, director of the financial focal point laboratory at the Chinese Academy of Social Sciences, a government think tank, referring to the central bank's measure of total credit from all sources.
"If this isn't accompanied by various forms of debt restructuring, some sectors may see their chains of funding broken and there could be defaults," he said.
China's ratio of total debt-to-GDP, including government, corporate and household debt, was set to reach 218 percent of GDP by the end of 2013, up 87 percentage points since 2008, rating agency Fitch estimates. Previous rapid debt-run-ups have been associated with financial crises in other countries.
The wide-ranging guidelines, known as Document No. 107, also follow two major cash crunches in the past six months. Short-term interest rates spiked to record highs as banks scrambled to come up with the money to pay maturing debts.
"In the last year, banks have been hit hard by liquidity problems. Quite a few banks wish the central bank would relax liquidity, but based on Document 107, it appears the relevant authorities don't agree," said Liu.
Many bankers attributed the interest-rate spikes in part to the growth of shadow banking. Ratings agency Standard & Poor's estimates that such banking totaled 44 percent of China's gross domestic product at the end of 2012. <CN/>
The latest policy also comes as an audit released last weak showed that China's local government debt reached 17.9 trillion yuan at end-June 2013, or up from 10.7 trillion at end-2010. <iD:nL3N0KA034> Local governments are among the largest recipients of shadow bank loans.
In China's policymaking process, the State Council typically issues broad guidelines, which regulatory agencies then follow up with specific rules.
The State Council says that shadow banking is a "beneficial" and "inevitable" consequence of financial development and provides an official definition of the term, according to a copy of the document obtained by Reuters.
But the guidelines also call for closer monitoring and tighter regulation of banks' off-balance-sheet lending, which is often conducted through intermediaries such as trust companies and securities brokerages.
Shadow banking has grown rapidly in China since 2010, when banks began running up against limits on expanding loans through traditional channels.
With credit demand still strong but banks increasingly constrained by regulations such as capital adequacy and loan-to-deposit ratios, institutions devised complex structures designed to keep lending to customers.
The State Council said that trust companies, which have emerged as the biggest non-bank players in shadow banking, should return to their original purpose as asset managers and should not engage in "credit-type business".
Trust companies raise funds by selling high-yielding investment products, using the proceeds to make loans or buy other assets.
Chinese savers have flocked to these products as an alternative to low-yielding bank deposits, a weak stock market and a frothy property market. Trusts surpassed insurance companies this year to become the non-bank financial institutions with the most assets under management.
If fully implemented, cutting off trusts' credit business could restrict lending to weak borrowers such as local governments and property developers, who are largely shut out from traditional bank loans but can still obtain high-interest trust loans.
Trust loans outstanding reached 4.62 trillion yuan at the end of September, according to the China Trustee Association. Such loans accounted for 11 percent of net new corporate fundraising in the first 11 months of last year, central bank data shows.
The latest guidelines follow a set of regulations issued in March, which limited the amount of shadow bank loans that banks could package into high-yielding off-balance-sheet investment products known as wealth management products.
With the new policies, authorities seek to address the problem of banks exploiting loopholes by clarifying the responsibilities of various regulators, including the People's Bank of China, the China Banking Regulatory Commission and the China Securities Regulatory Commission.
The fresh guidelines also call on the PBOC to develop new statistics to measure shadow banking and to make regular reports to the State Council.
The guidelines also address internet finance, micro-lending, and informal lending by friends and family members.
Reporting by Xie Heng, Zhao Hongmei, Xu Yong and Gabriel Wildau; Editing by Richard Borsuk