BEIJING -- Aggregate financing in China reached an all-time high last year, according to the People's Bank of China, the country's central bank, released on Jan. 15. This high is thanks largely to financial transactions that circumvent banks, a practice known as shadow banking.
Total social financing (TSF), an indicator unique to China, grew about 10% on the year to 17.29 trillion yuan ($2.85 trillion). TSF shows the amount of money supplied to society as a whole during the period covered. It includes bank loans, corporate bond issuances and lending by parties other than banks.
Yuan-denominated bank loans accounted for 51.4% of total credit in 2013, down 0.6 percentage point from the year before. But business-to-business lending -- the main type of shadow banking -- doubled to 2.55 trillion yuan. Funding through trust companies grew about 40%. These two types of shadow funding made up 25% of the total, up from 16% in 2012.
The rise of shadow banking can be traced back to the 4 trillion yuan economic stimulus package the Chinese government introduced in response to the 2008 global financial crisis. TSF surged from roughly 7 trillion yuan in 2008 to around 14 trillion yuan in both 2009 and 2010. Shadow banking received an additional boost as individuals bought high-yield financial products, which funneled their money to trust companies and other entities.
No place like homes
In China, the government sets a ceiling on deposit interest rates in order to help banks secure profits. Insider trading is rampant in the stock market, and this puts ordinary retail investors off stock transactions. With investment in overseas securities also restricted, surplus funds of individuals and businesses flow into the real estate market through every possible route. This in turn has caused the money game to overheat in China.
A shadow banking sector expanding at a faster clip than the real economy opens the door for more bad loans, raising the risk of economic volatility.
In China, the international indicator of money supply (M2) also rose 13.6% year on year at the end of 2013, with the increase surpassing the government's target of 13%. The country's central bank is seen edging toward a tight monetary stance in a bid to rein in credit expansion to reduce the supply of funds to the financial market. Given a spike in short-term interest rates on the interbank market late last year, however, the central bank hurriedly resumed money supply.
Faced with the contradictory situation in which supply-demand balance of funds is tight amid ample liquidity, the bank appears intent to continue its basic position of maintaining a moderate, which means neutral, monetary policy through this year. But the bank will also likely find it increasingly more difficult to handle monetary policy.