China started the new year with a flurry of rules that may tighten financing for less-creditworthy borrowers, as policy makers prioritize efforts to limit broader risks to the financial system.
Over the first few days of 2018, the nation’s top regulators announced rules governing banks’ involvement in entrusted lending, barred insurance firms from extending loans in the guise of equity investment and tightened supervision on leveraged bond trading.
China is growing more confident in economic growth, giving leaders increased opportunities to clean up the most risky corners of the financial system. Closing regulatory loopholes and thereby slowing the pace of credit growth may enable policy makers to reduce systemic dangers, as the new rules make it more difficult for riskier firms to borrow, curb local infrastructure investment and limit a key funding source for some banks.
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“The new financial regulations are targeting shadow lending, and will eventually curb broad credit growth,” according to Morgan Stanley’s chief China economist Robin Xing. Property and infrastructure investment would be affected most by the tighter regulation, Xing said, adding that he consequently expects a slight growth deceleration this year.
Here are the key regulation changes proposed over the last few days and their possible impact:
Entrusted Loans
The China Banking Regulatory Commission ordered banks to ensure they aren’t exposed to risks from their entrusted loans business, according to rules released over the weekend. The lenders should also cap their credit-risk exposure to any one client, according to a separate draft regulation.
Entrusted loans, by which companies provide finance to each other with banks acting as intermediaries, are a key source of funding for firms that have difficulty accessing regular loans. Larger state-owned companies with easier access to cheaper credit may sometimes lend on to smaller firms and profit from the difference in interest.
The expansion in the use of entrusted loans had already slowed amid last year’s deleveraging campaign. This renewed tightening will further curb such arrangements, potentially leading to funding difficulties for those dependent on them.