Economists back China lending crackdown

Economists have backed China’s moves to crack down on risky informal lending in the economy as part of its bid to reduce the pace of economic growth.

In recent weeks, the interbank lending rate in China surged to double digits, prompting concerns of a credit crunch.

The worries were fuelled further when the People’s Bank of China (PBoC) said liquidity was “reasonable”, although it later suggested it would support banks where necessary.

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But economists have said the PBoC’s moves to crack down on risky informal lenders, known collectively as the shadow banking system, are warranted. Shadow banking has kept credit growth higher than the government would like and in turn fuelled unwanted levels of poor-quality economic growth.

Peter Dixon, global equities economist at Commerzbank, said the idea of “rebalancing” the economy had been “uppermost in the minds of the Chinese”, and one way to do this was to restrict the “poorly regulated and inefficient” shadow banking sector.

“The shadow banking sector is big, and the banks are competing for a relatively small pool of liquidity, causing this crash to happen,” he said.

Robin Marshall, economist at Smith and Williamson, agreed that the bank was withholding liquidity as a means to regulate lending, given shadow banking had grown “20-30 per cent per annum” and the PBoC was “anxious to prevent excessive, poor-quality asset growth”.

Mark Williams, chief Asia economist at Capital Economics, said the PBoC’s restrictions were aimed at rebalancing the Chinese economy.

“We take this as a positive for the medium term,” he said.