China acting on non-bank lending

China acting on non-bank lending
Credit: Reuters

China is taking steps to deal with the high levels of non-bank lending which helped prop up its economy in the aftermath of the global financial crisis, according to Stuart Parks.

The Invesco Perpetual manager said the issue of large amounts of loans issued by non-banking institutions– known as shadow banking – had been a significant headwind for investor sentiment on the world’s second largest economy.

Mr Parks said loans had been made to companies and projects which “will never have the ability to repay the loan they were given” – but now progress was being made.

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“What we have started to see is mechanisms put in place where the state starts to take on the responsibility itself rather than the shadow banking system,” he said.

The manager said this had been done in the form of local government bonds, which had the “implicit guarantee by the state” that they would be repaid.

“There is only 1trn renminbi for this, and estimates [for what is needed] are far higher – but as a pilot project it shows the government is aware of the extent of the bad debt problems,” he added.

He said this showed the government was “likely to stand up” to make sure the banking system was protected.

“I think it is quite good news for the banking system and the economy as a whole,” he said.

Elsewhere, the manager thought China could enter a cycle of easing its monetary policy and thought the stockmarket could move even higher in spite of the extremely strong rise in the country’s A-share market in the past year.

The manager said any sign of weakness in the market was met with “something soothing” from the central bank or government and that there were few signs of overheating in the economy so the stockmarket “does not need to be deflated”.

The manager added he thought the reserve requirement ratio – the amount of deposits banks have to hold at the central bank – would also fall from its 18 per cent level and enable banks to lend more.

He said at 18 per cent, the ratio was high relative to its own history, as well as compared to other countries.

“I envisage a substantial reduction in the reserve requirement ratio in the next year or so,” he said. He added the country was also likely to reduce interest rates to encourage consumer spending.

“China is in the same place now as places in the rest of the world were two to three years ago, with the economy slowing and inflation non-existent. The central bank has got a pretty straight road to reduce interest rates to stimulate economic activity.”