August 1, 2018 / 7:02 AM / in 10 months

China should limit credit impact of deleveraging: central bank adviser

BEIJING (Reuters) - China should limit the credit impact of the country’s financial deleveraging drive, a central bank adviser said on Wednesday, as policymakers seek to boost support for the slowing economy amid a deepening trade war with the United States.

Chinese regulators should not kill all shadow banking activities, but they should channel such off-balance sheet loans into the real economy, Sheng Songcheng, an adviser to the People’s Bank of China, wrote in an article published in the Chinese financial magazine Caixin.

Although formal bank loans have risen, Sheng pointed to sharp drops in trust and entrusted loans and bankers’ acceptances following an official crackdown, voicing concern that the tightening may have gone too far.

“Credit is not tight as bank loans are sufficient, but other financing channels have been tightened too much,” Sheng said. “The marginal effect of financial deleveraging should not be tightened further.”

Chinese banks extended 1.84 trillion yuan ($270.17 billion)in net new yuan loans in June, the highest in five months, as policymakers seek to underpin economic growth.

But net new loans for the real economy accounted for 96.3 percent of the total social financing in the first half, Sheng cited central bank data as saying.

“This indicator is extremely abnormal because it means the real economy can only rely on yuan loan financing, indicating that other financing instruments and financing channels have not been effectively utilized,” he said.

Combined trust loans, entrusted loans and undiscounted bankers’ acceptances, which are common forms of shadow banking finance, shrank by 1.26 trillion yuan in the first six months, central bank data showed.

Year-on-year growth in China’s outstanding total social financing, financing (TFS) slowed to 9.8 percent in June, the lowest on record, while growth in broad M2 money supply hit a record low of 8 percent.

Reporting by Beijing Monitoring Desk and Kevin Yao; Editing by Simon Cameron-Moore

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