HONG KONG (Reuters Breakingviews) - China’s gummed-up credit system is threatening growth. The economy expanded 6.5 percent in the third quarter, missing expectations, as other indicators cooled too. The campaign to quash financial risk has squeezed private companies, and exhorting banks to lend more to small firms won’t cut it in the long run. Officials have little choice but to let shadow lenders find their place in the sun.
The economy is not in desperate straits yet, but confidence appears shaken. Fixed-asset investment growth has seen record lows, and retail sales have cooled. Officials are pushing for fiscal support – such as infrastructure spending – and dropping none-to-subtle hints about easing the deleveraging campaign. They’ve also prodded banks to lend more to small- and micro-enterprises.
Unfortunately, the banking system has a big transmission issue when it comes to offering credit to smaller borrowers. At the same time correcting stock markets makes it harder for private companies to raise funds via equity, or borrow using pledge shares; bond issuance is tough too.
September lending data showed total social financing, a homegrown measure of total credit flow, shot up to $320 billion, up almost 20 percent year-on-year. But strip out methodological changes, and aggregate lending grew only 10.6 percent, most of that from conventional loans.
The problem is the weakness of shadow banking, which has been heavily constricted by new regulations. Two of the most important categories, new entrusted and trust loans, together shrank 234 billion yuan in September, having contracted 190 billion yuan in August, according to calculations by Nomura economist Ting Lu.
It’s only a matter of time before policymakers are forced to loosen up. There is no question that China’s shadow banking industry had become a place to hide a lot of duff loans, and officials will need to keep cleaning it up. But they cannot afford to turn it off. The shadow banking industry also functions as an efficient allocator of credit, and reviving instruments like short-term commercial paper – in particular banker’s acceptance notes – could help with quick liquidity. If economic performance stays wobbly, shadow bankers will by necessity become part of the solution, not the problem.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.