A Matter Of “Trust”: A Look Inside China’s Crackdown Of Its $3 Trillion Shadow Banking Industry
As discussed here in mid-August, when China reported its latest credit data, for the first time in 9 months China’s trillion Shadow Banking Industry – defined as the sum of Trust Loans, Entrusted Loans and Undiscounted Bank Loans – contracted.
These three key components combined resulted in a 64BN yuan drain in credit from China’s economy, the first negative print since October, seen by analysts as more evidence that Beijing’s campaign to contain shadow banking and quash risks to the financial system, is starting to bear fruit.
And, as a follow up report from Reuters overnight details, the crackdown against unregulated shadow financing is accelerating, noting that as the flood of unregulated cash swirls through the Chinese economy, Beijing has been taking aim at the trust companies whose unrestrained lending practices are worrying regulators. The trusts, which as we have discussed previously are at the heart of a vast shadow banking industry, are being pressured to step up compliance and background checks, and are being pushed towards greater transparency.
Something strange is going on in the financial system. And according to The Wall Street Journal, it’s causing some investors to move massive amounts of money out of the banking system.
But the fast-growing 20 trillion yuan ($3 trillion) industry, whose lending operations are cloaked behind opaque structures, will be tough to rein in, according to employees at some trusts.
As Reuters details, a regulatory sanction against one trust, Shanghai International Trust, and a legal case against another, National Trust, offer rare insights into the industry, and reveals just how hard it will be to police it.
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