China's shadow banks face squeeze as defaults surge
NORIYUKI DOI, Nikkei staff writer
SHANGHAI -- Money flows are drying up in China's shadow banking sector as lenders grow increasingly anxious about borrowers going bust.
Default fears were heightened by Premier Li Keqiang's recent warning that a wave of debt defaults is unavoidable. China's shadow banking sector, which has grown substantially in recent years, was hit hard by Li's remarks.
As the supply of funds dwindles, borrowers are having trouble getting loans. This, in turn, is contributing to a downturn in the housing investment that has fueled China's economic growth. With January-March gross domestic product growth coming in at 7.4%, the lowest figure in six quarters, the liquidity crunch is casting a shadow over the country's economy.
An abandoned construction site stands a lonely vigil on the outskirts of Nanjing, Jiangsu Province.
The Furun Plaza project, some 300km northwest of Shanghai, was to have a 22-story commercial and office complex, including a supermarket and a big-box consumer electronics retailer on the first four floors, and offices above. But the work ground to a halt when Nanjing Fudi Real Estate Development, the local developer in charge of the project, went belly up.
"The building would have been completed by now under the original plan, but the construction stopped last August due to unpaid construction fees," said an employee of the project's contractor. There are no plans to resume construction and the head of the property developer has disappeared.
Sainty Marine, a shipbuilder, is caught up in the mess. The Jiangsu-based company lent 90 million yuan ($14.4 million) to Nanjing Fudi through a bank in October 2012, lured by the promise of 18% annual interest. But with the borrower effectively bankrupt, Sainty Marine is unlikely to see its money again.
Bringing borrowers and lenders together is one of the main functions of China's shadow banking system. In theory, the banks act as brokers, earning commissions and avoiding any default risk. In practice, however, they often provided financial aid to big clients who get burned in these informal deals.
But this arrangement appears to be ending, probably because defaults are becoming too numerous and too large for banks to continue plugging holes. Sainty Marine filed a lawsuit to recover the loan, but it seems certain the company will lose the money it lent; there is little chance the bank that brokered the loan will help it.
The wave of loan defaults has also affected China's money supply, which has grown dramatically in recent years. M2, which includes cash, bank deposits and other highly liquid assets, grew just 12.1% on the year in March, missing the government target of 13% growth for 2014. The expansion was the slowest since May 2001.
One major factor behind slowdown was a drop in capital inflow from overseas. Another is "the slowing pace of credit creation by banks," according to Bank of America Merrill Lynch.
As regulation has grown tighter, banks appear to be putting less of their money into risky wealth-management products.
The slowing money supply growth is also visible in "social financing" data, which tracks changes in total credit growth in China by taking into account loans and bond issuance. In March, the data showed a 19% drop from a year earlier. Trust loans, a key wealth-management product, plunged 78%.
The slowdown in money supply growth makes it harder to obtain funds for real estate and other fixed-asset investments. Partly because the housing market has turned south and more home sellers are being forced to cut prices, housing starts slid 25.2% on the year on a square-footage basis in the January-March quarter.
Beijing has decided to let loans go sour in hopes of restoring market discipline, but the policy is tightening the money supply as the shock waves pass through the shadow banking system. Some observers warn China is in danger of falling into a vicious circle of declining money circulation and slowing growth.
Fiscal and monetary policies are essential to stop that from happening. But it will be difficult for the government to initiate a big economic stimulus package -- like the 4 trillion yuan it spent following the global financial crisis -- because much of Chinese industry is suffering from overcapacity.
Meanwhile, hopes are growing in financial markets for monetary easing despite denials by the People's Bank of China that it has plans to open the monetary spigot after March money supply growth failed to reach the 2014 target.