China's Shadow Banking Sector Is Shriveling

chopping, chop, hot peppers, chinese food, black sesame kitchen, wudaoying hutong, beijing, china, october 2011, bi, dng

Photo: Daniel Goodman / Business Insider

We used to hear about how high lending rates in the informal lending system in China were relative to the PBOC benchmark.  Although they are still very high, rates have definitely come down a lot.

That is according to Yicai, which reports that underground lending rates in Shenzhen have fallen from the high of 120% per annum (yes, you read it right) to somewhere between 28-32% per annum.  On top of that, discounts are often offered, so the actual rates could be much less.  One of the creditors in Shenzhen is offering 2.3% per month, and discounts can be offered to borrowers who borrow more than a few million RMB, while another one suggested that monthly rate has fallen to 1% or below on average.

The fall is attributed partly to the lack of demand for credit as the economy slows, consistent with our belief that China is in a debt deflation, which means that demand for credit shrinks as overstretched private sector deleverages.  Not only is demand in underground banking falling, the volume of trusts products issuance will likely fall on a month-on-month basis in July according to Yicai after hitting a record high in June.  On top of the lack of demand for credit, recent concerns over the credit risks within the trust industry are also said to have made these trusts companies cautious.

Although major state-owned banks have increased the pace of lending, we believe it was mainly due to the government directed lending for financing investment projects which are aimed at stabilising economic growth.  The picture from the shadow banking is definitely a different one, a picture of debt deflation as private sector deleverages.

This article originally appeared here: Underground lending rates fell as demand for credit shrank
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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