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Absolute growth in risky products has remained strong.

Shadow banking sector growth beginning to stabilise

Analysts say controls introduced on the off-balance-sheet lending are taking effect as non-bank share of market drops to 20pc

Don Weinland

Growth in the mainland's shadow banking sector probably began to stabilise in the first half of this year, according to new industry data.

But the slowdown in growth in key segments such as trusts belied expansion in more opaque investment products and the accumulating risk in refinanced property loans, analysts said.

Trust products, already flagged as a flashpoint for defaults this year, grew by 25 per cent year on year in the second quarter, down from 35 per cent growth in the same period last year, data from Moody's Investors Services showed.

Traditional bank loans rose last month to about 62 per cent of total social financing, the mainland's broadest measure of credit, from 55 per cent at the end of last year. The shadow banking share dropped to about 20 per cent from a peak of almost 30 per cent last year.

"In other words, it's the formal, regulated banking sector that has substituted for the shadow sector as the controls introduced on that sector have begun to have an effect," said Michael Taylor, chief credit officer at Moody's, pointing to several regulations issued earlier this year meant to control off-balance-sheet lending.

While a slowdown in certain shadow banking areas was positive news for the mainland economy, absolute growth in risky products has remained strong.

The entire shadow banking spectrum, which includes wealth-management products, trusts and several other forms of loosely regulated non-bank lending, was worth 37.7 trillion yuan (HK$47.5 trillion) at the end of last year, or 66 per cent of mainland gross domestic product, Moody's data showed, up from 52 per cent at the end of 2012.

Growth is slowing in trust refinancing for local government projects but the rollover of loans has waned only from voracious to less voracious. Issuances of those products slowed to below 50 per cent year-on-year growth in the second quarter of the year, down from above 160 per cent growth in the first quarter of last year.

Demand for refinancing across the trust sector had remained strong while demand for new loans was weakening, said Patricia Cheng, China banks analyst at CLSA.

That is a bad sign, indicating the mainland's robust off-balance-sheet credit industry is propping up bad investments, not feeding the real economy. In the property market in particular, refinancing of loans now increasingly underpins prices.

"If developers can't refinance, they might have to cut prices a lot more aggressively to get the cash flow," Cheng said, noting recent discounts in various real estate markets across the mainland. "That's not something the government wants to see."

And so the bailouts of troubled trusts have continued. Officials fear that the collapse of a single local product could trigger a chain reaction of defaults across the mainland. "No official wants the first default on their watch," Cheng said.

Decelerating growth in trusts does not mean that all those funds have returned to bank balance sheets. A likely result of regulations issued in the first half of the year was an increase in wealth-management products that are even harder to track.

"Some of the trusts have definitely been replaced somewhere else," said David Cui, a Singapore-based strategist at Bank of America Merrill Lynch, although he noted that supply and demand for trusts had also slowed.

Limited partnership funds are one culprit.

There are only 66 licensed trust companies and their products have limits on duration and minimum number of investors, Cui said. On the other hand, the number of limited partnership companies is unrestricted, as are the duration of products and number of investors.

New regulations has probably pushed shadow bankers further underground, Cui said, making data on the sector increasingly difficult to collect.

This article appeared in the South China Morning Post print edition as: Shadow banking growth stabilising
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