China Slows Pace of Lending, but Informal Loans Increase

China Slows Pace of Lending, but Informal Loans Increase

New Credit Fell in Second Half, Though It Rose 9.7% for the Full Year

BOB DAVIS and DINNY MCMAHON

Updated Jan. 15, 2014 10:28 p.m. ET

BEIJING—Chinese lending slowed in the second half of last year, according to data released Wednesday, but that did little to dent a buildup of debt that has left the nation’s financial system increasingly vulnerable.The slowdown shows some success in Beijing’s efforts to rein in runaway credit, though lending numbers from the central bank out Wednesday also underlined that those efforts have had limited effect on so-called shadow lending.

After a robust rise in lending in last year’s first half, the People’s Bank of China said new credit fell by 10.7% to 7.135 trillion yuan (about $1.18 trillion) in the second half compared with the year-earlier period. But for all of 2013, overall new credit rose 9.7% to 17.29 trillion yuan compared with 2012. The central bank’s data concern total social financing, a broad measure of credit in the Chinese economy.

Economists said the second-half credit slowdown was due in part to the government pushing up interest rates, which reduced demand. Also, the year-ago period was a time of a big expansion in credit, as the government looked to make sure growth topped its 7.5% target for the year. Still, they said, new credit in the second half of 2013 wasn’t that much lower than the year before. “The government is trying to get a handle on credit flows, but the overall leverage still seems high,” said Nomura analyst Zhiwei Zhang.

Lending by shadow bankers—an assortment of trust companies, securities firms, insurance companies and other informal lenders—is powering the climb in China’s new debt.

The central bank, which doesn’t have regulatory authority over shadow banking, has instead sought to force up interest rates on the market where banks borrow from one another as a way to slow shadow lenders, who also get funds through the interbank market. But its heavy-handed approach in June—when interbank rates briefly reached as high as 30%—and to a lesser degree in October and December, caused anxiety in markets. Now the PBOC is looking to assert some regulatory power over the shadow sector.

In 2013, lending by shadow-banking institutions rose 43% to 5.165 trillion yuan compared with 2012, the central bank reported. It doubled to 2.865 trillion yuan in the first half of the year compared with the 2012 period, and rose 5.1% in the second half.

Since the global financial crisis of 2008 and 2009, China’s debt levels have grown at a clip similar to the U.S., the euro zone and South Korea before those economies fell into deep recessions. While few economists forecast such an outcome for China, at least in the near term, the country’s debt accumulation could eventually slow growth, as occurred in Japan during the 1990s.

Many of the loans from shadow lenders go to borrowers that traditional banks deem too risky. That can include local governments, real-estate developers and corporate borrowers in industries plagued by overcapacity.

Sheng Songcheng, head of the central bank’s statistics department, said at a news briefing Wednesday that the PBOC would encourage shadow lenders to channel their loans to borrowers pursuing projects that would boost economic growth. “We should see [shadow banking’s] positive roles and risks in them at the same time,” he said.

Clamping down too hard on credit risks undermining growth, as projects go begging for cash. Royal Bank of Scotland RBS.LN +1.46% analyst Louis Kuijs estimated that China is still adding to its total domestic credit at a pace that is roughly twice the rate of GDP growth, and that Beijing would move slowly to decelerate.

“Even though the government is trying to move toward a slowdown, we’re only at the beginning,” he said.

Beijing has had some success in limiting growth of loans made by trust companies, which have been the most important platform of the shadow-banking system since 2009. However, even as Beijing cracks down in one area, other sources of shadow credit have ballooned, filling the gaps caused by any funding shortfall.

Entrusted loans, whereby companies lend directly to one another, accounted for 14.8% of total social financing in 2013, the second largest category of new credit behind banks loans. In 2012, it represented only 8.1%. In the second half of 2013 entrusted loans represented more than 20% of all new credit created during the period, or 1.4 trillion yuan.

Entrusted loans allow companies that have spare cash to earn a higher return than if they park it in a bank as deposits or buy bonds, although it exposes them to significantly more risk. Still, the returns can be exceptionally high. Property developers and local government-backed infrastructure companies, which can’t readily tap bank credit, are willing to pay high interest rates to anyone willing to lend.