China Makes Progress On Shadow Lending Battle

China appears to be making progress in its fight against shadow lending even as new lending overall increased in April, according to data reported by Reuters on Friday (May 11).

Chinese lenders issued $186.37 billion in new loans last month, higher than expectations and an increase from March levels, reports said. Analysts cited efforts from local regulators to promote local businesses and support economic growth amid threats of U.S. trade sanctions.

The data differs from a survey conducted by Reuters, which found a slight decrease in new yuan loans issued in China last month.

Reports noted that the data also showed that Chinese officials are making headway in their efforts to curb shadow banking. But according to Capital Economics’ Julian Evans-Pritchard, there are challenges ahead that could put continued pressure on China’s economy.

“The upshot is that the ongoing regulatory crackdown and past monetary tightening remain a drag on credit growth. There are signs that the policy stance is now shifting,” Evans-Pritchard said. “Policymakers are discussing possible steps to support domestic demand and the PBOC [People’s Bank of China] has guided market interest rates lower since the start of the year, However, it will take a few quarters for any loosening of monetary policy to drive a turnaround in credit growth.”

“Credit growth looks set to slow further, which should weigh on economic activity during the remainder of this year,” Evans-Pritchard added.

Last month, two unnamed sources told Reuters that the China Banking and Insurance Regulatory Commission (CBIRC) had begun deploying teams to local bank branches to monitor how loans are assessed in a broad crackdown on risky lending practices. The watchdog is initially focusing on consumer and real estate lending practices, the sources said.

It was the latest in a series of efforts by the China Banking Regulatory Commission (CBRC), which merged with the nation’s insurance watchdog earlier this year to form the CBIRC, to crack down on shadow and risky lending practices in the nation’s financial services sector.

“Banking shareholder management, corporate governance and risk control mechanisms are still relatively weak, and root causes creating market chaos have not fundamentally changed,” the CBRC said in January. “Bringing the banking sector under control will be long-term, arduous and complex.”