New CBRC rules aim to keep Chinese growth in the real economy

Emerging Markets ADB editions, May 4 2013

New regulations will come into effect in China today designed to ensure that Chinese credit growth makes its way into the real economy, and not just real estate speculation.

In April, the China Banking Regulatory Commission told banks it would require them to provide more detailed reports on loans they provide to other financial institutions through the interbank market, with effect from today. The change in policy reflected a fear that such interbank loans are either concealing bad loans, or fuelling speculation in the buoyant real estate market.

The change is believed to affect all domestic policy banks, state-owned banks and joint-stock banks in any interbank lending made to other banks, brokerages or investment funds.

Although China’s credit growth has been considerable, it does not appear to have been matched by growth in the economy, something that has puzzled economists. “A slowdown in GDP during 1Q has taken the world by surprise,” said Qu Hongbin, chief China economist at HSBC, in a recent note to clients. “But an even bigger surprise is that this has occurred at a time when total social financing, China’s broad measure of credit, has reached a new high. What’s really going on?”

The People’s Bank of China said in April that social financing – a measure of funds raised by entities in the real economy – amounted to RMB6.16 trillion in the first quarter, up RMB2.27 trillion from the same period last year. Yet China’s GDP growth slipped to 8.1% in the first quarter, from 8.9% in the previous three months – a fifth consecutive quarter of slowing growth, and below analyst forecasts.

Qu argued that one reason was because credit was a leading indicator that typically takes three to six months to turn into output; and that non-loan financing has led to growth in total social financing, and in particular, trust loans, which jumped by RMB823 billion in the first quarter. “Given all the recent talk about tightening the rules on wealth management products, it comes to us as no surprise that trust companies are frontloading their lending,” Qu said. “The lag and the frontloading explain why credit has surged while real GDP has been slow to catch up.”

While dampening property speculation has been a perennial bugbear for Chinese regulators, it is becoming increasingly clear that wealth management – partly fuelled by these trust loans, a key element of the so-called shadow banking system in China – is capturing their attention too. This week CBRC said it would implement an off-site registration system for commercial banks’ wealth management products to strengthen disclosure; this followed new CBRC regulation to strengthen oversight of bank wealth management products in March, requiring banks to link their products with specific assets and to disclose the intended purpose of the product.

Earlier this week former CBRC chairman Liu Mingkang warned about the growth of the wealth management industry as a key challenge for the country’s banks. “Everyone is doing wealth management in China nowadays: not just the banks but insurance companies, security firms, all kinds of funds. We should heighten our vigilance and make sure we understand the products we sell, the customers, and the risks.”