China’s Renewed Drive to Tame Its Debt Pile Starts to Bite – 5 May 2017

  • Signs are emerging that the Chinese government’s renewed drive to curb financial leverage is starting to bite. The number of wealth-management products issued by Chinese banks slumped 39% in Apr 17 from the previous month, while trust firms distributed 35% fewer products, according to data compilers PY Standard and Use Trust. Sales of negotiable certificates of deposit, a popular instrument of interbank lending known as NCDs, tumbled 38% from a record, figures compiled by Bloomberg show.
  • The system-wide contraction is a result of a flurry of government measures over the past month that included ordering banks to bolster risk controls, stepping up scrutiny of shadow financing and cracking down on malfeasance among senior bureaucrats. While the moves have rocked China’s financial markets, the government is sending a clear signal of its determination to curb the estimated USD28tr debt pile that poses a risk to economic stability.
  • Meanwhile, trust companies raised about CNY80bn from selling 543 products in Apr 17, compared with the CNY189bn raised from 835 products in Mar 17, according to Use Trust, which is based in the city of Nanchang.
  • Sales of NCDs, which have become increasingly popular among smaller banks as a funding source, tumbled to CNY1.32tr in Apr 17 from a record CNY2.2tr month earlier, according to data compiled by Bloomberg.
  • The impact of the regulatory crackdown has already turned up in bank profits after the measures drove interbank borrowing costs to a two-year high. 1Q17 results announced last week showed that net interest margins for some smaller banks contracted, while margins for net lenders on the interbank market expanded.

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