Cracks Are Showing in China’s Shadow Banking Industry
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Recent payment delays shake confidence of Chinese depositors
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Refinancing of maturing products hurt by slump in issuance
Strains are spreading in China’s $15 trillion shadow banking industry as investors pull back from the debt-like savings products that helped drive leverage to dangerous levels.
Most affected are some $3.8 trillion of so-called trust products, until now the fastest-growing shadow banking segment and a popular way for debt-ridden property developers and local governments to raise funds from millions of ordinary Chinese. In recent weeks, at least two of the products have been forced to delay payments as the market started to freeze up, making it harder to refinance maturing issues with new ones.
“On the one hand you have cash-strapped borrowers scrambling for refinancing; on the other you have cash-rich investors not knowing where to put their money for fear of getting burned,” said James Yang, a sales manager at Shanghai Xiangyi Asset Management Co.
China has doubled down on steps to cut leverage in the financial system after President Xi Jinping consolidated power at a key party congress last year. Authorities have issued a flurry of regulations in recent weeks to curb shadow banking, adding to about 30 new rules published since March when the government stepped up its deleveraging drive.
China also doesn’t have the sort of risky financial products that crashed the American housing market and infected the global economy a decade ago.
But a slowdown can have a wide impact. China’s property market accounts for a significant share of economic growth — as much as a third, according to Moody’s Investors Service — sending ripples outward into the global economy. The property boom stoked imports of housing materials, cars, appliances and other products. UBS called Chinese property one of the major engines of global growth in 2017.
Stricter lending limits cut the level of new mortgage debt each month toward the end of 2017; before that, mortgages made up as much as three-fourths of new loans in some months.
But many households have taken on riskier debt, such as short-term consumer loans, to make down payments — a practice technically not allowed.
Luo Chuanyun, a 29-year-old liquor distributor, bought his first apartment on Beijing’s northern edge for $150,000 in late 2016, when prices were climbing by more than 20% a year.
The purchase put Mr. Luo up to his neck in debt, with mortgage payments of about $15,000 a year on an annual income of a little over $18,000.
Mr. Luo said his real-estate agent told him that to find a buyer for his apartment now he would need to sell for half of what he paid. “I’d be short too much money,” Mr. Luo said.
Don’t mention the debt, censors warn Chinese media
Chinese media outlets were told not to play up the financial and debt problems of big Chinese conglomerates such as HNA Group and Dalian Wanda Group, according to two sources briefed on the instructions issued by the authorities.
The instructions issued a few weeks ago were not a ban on coverage of specific companies, but a reminder that media reports should not help stir or spread market panic, the sources said.
Another two sources with Chinese state media told the South China Morning Postgeneral guidelines on cautious reporting to ensure market stability were always in place, but were often updated with more specific instructions if there were signs of turbulence in the markets.
Sections of Chinese media are directly controlled by the government, with other commercial outlets subject to routine scrutiny by official censors.
A leaked document from China’s banking regulator last June showed Beijing was placing the country’s high-profile global deal makers under increased scrutiny, although the Chinese government has never named any companies targeted in official statements.
China Orders State-Run Companies to Make Profits
China has taken the unusual step of ordering its biggest state-owned enterprises to earn profits this year as the government increases its scrutiny of bloated businesses, according to people familiar with the matter.
The State-owned Assets Supervision and Administration Commission told senior executives on Jan. 15 about the edict, which will apply to all of the nation’s 98 central SOEs, according to the people, who asked not to be named because they weren’t authorized to discuss the matter with the media. It was the first time in recent memory that the government made it mandatory for SOEs to make profits, they said.