China's Shadow Banking Grinds To A Halt As Bad Debt Surges Most In A Decade

Tyler Durden's picture

It is probably not a coincidence that just as we learn that "China’s bad loans jumped by the most since 2005 in the third quarter, fueling concern that a cooling economy will be further weakened as banks limit lending to avoid credit risks" that we also learn that in the month of October, China once again slammed the brakes on credit creation, with total new loans dropping to RMB548 billion from RMB857 BN, below the RMB626 BN expected, the lowest monthly expansion in 2014...

... and with the broader Total Social Financing aggregate also tumbling from RMB1050 billion to RMB663 BN, and well below the RMB888 BN consensus estimate.


As the following chart shows the main reason for China's relentless slowdown in its growth pace, which only two years ago was expected to rebound back into the double digits soon (at least according to the IMF), is the ongoing contraction in credit formation, which rising at 13.2% for new loans and 15.4% for TSF outstanding, was the lowest credit expansion recorded in China also since 2005.

So what is the main culprit for the contraction in China's all important credit formation? In two words: shadow banking. As Bank of America summarizes "shadow banking is being tamed" because "the changing structure of TSF suggests that Beijing’s efforts in controlling some types of shadow banking have made some achievements. Two major drivers for the steep decline of TSF from Sept to Oct were the falling of non-discounted bills (down RMB241bn) and falling trust loans (down RMB22bn). By contrast, new corporate bonds were at RMB242bn, a sharp rise from RMB151bn in Sept."

Breaking this further down:

  • New trust loans posted a negative RMB22bn in October compared with a fall of RMB33bn in September. New entrusted loans declined to RMB138bn in October from RMB161bn in September.
  • Non-discounted bankers acceptance (BA) decreased by another RMB241bn in October after decreasing by RMB669bn between July and September. The new deposit deviation ratio regulation has significantly restricted those manipulations via BA issuance, which may boost balance sheet.

In other words, China's shadow banking not only ground to a halt, it actually continued moving in reverse!

A better explanation comes from JPMorgan:

The monthly Chinese money and credit figures released this week showed continued contraction in the share of shadow bank intermediation in new credit creation. Figure 6 shows that the share of shadow banks, proxied by the ratio of monthly total social financing over monthly new bank loans, has been on a downward trajectory since the end of 2013, experiencing its fourth episode of slowing since 2010. As of October this year, our smoothed trend in the share of shadow bank intermediation (blue line in Figure 6) stood at its lowest level since 2009. The previous episodes of slowing in shadow bank intermediation during the first halves of 2010, 2011 and 2013 did not see such a sustained pace of contraction. This likely reflects the impact of regulatory tightening on shadow banking activity. With the ratio in Figure 6 approaching 1.0, the picture we are getting is of almost all of new credit creation in China being intermediated via traditional rather than shadow banks currently.


In other words, as China finally reveals little by little the true extent of its gargantuan bad debt problem (which is far worse than ever in history, although Beijing is taking its time in making the necessary revelations: and after all Chinese banks are all SOEs - if needed they can all just get a few trillions renminbi in in liquidity injections a la the "developed west"), it is also slamming the breaks on the shadow banking system that for years what the sector where marginal credit creation, and thus growth as well as bad debt formation, was rampant.

And as Japan showed so clearly just 48 hours after the end of America's own QE3, reserves, like credit and money, are infinitely fungible in the global interconnected market. And infinitely, no pun intended, in demand, because if one central bank ends the goosing of risky assets, another has to immediately step in its place.

So while it has been widely documented that Japan is doing all in its power to crush the Japanese economy and in the process to send the Nikkei to all time highs, little has been said about a far greater slowdown in domestic (and indirectly global) credit creation using the "China" channel, where shadow banking has just slammed shut.

Finally recall: it was the epic collapse in America's own shadow banking liabilities in the aftermath of the Fannie and Freddie, and shortly thereafter, Lehman bankruptcy, which wiped out $8 trillion from the US shadow banking peak, that was the main reason for the Fed's relentless intervention and attempts to reflate systemic funding since then.

If the shadow banking collapse virus has finally jumped to China, there is no saying just how far Chinese GDP can drop if it is now constrained on the top side by surge in bad debt. One thing is certain: Japan's paltry, in the grand scheme of things, expansion in its own QE will barely be felt if the record Chinese credit creation dynamo is indeed slamming shut.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Glass Seagull's picture



Debt:  been offing economies since 2000BC

buzzsaw99's picture

breaks, brakes, whatever :/

Ban KKiller's picture

Isn't it time for some suspect banker death? Say, death by boiled noodles? 

Ok, long noodle death, short tall buildings. Now, that is counter.

BurningFuld's picture

Paging Vladimir Putin...Paging Vladimir may be getting in to bed with the wrong person......paging Vladimir Putin.....

The Most Interesting Frog in the World's picture

I wanna see Putin and Obama fight. I would put money on Putin, but you never know maybe all the KGB stuff is bullshit. It would be entertaining at a minimum.

NoDebt's picture

Putin could make Obama quit the fight with nothing more than mean words.  His breath alone could knock Obama over.  

But who really cares what they could do in a fair fight anyway?  Obama's masters would order him to take a dive while they bet heavily on the outcome.

Never One Roach's picture

I read there's a flood of money leaving Mainland thru 'intermediaries' who bypass the official limits. Basically, you give them the money in Mainland, and they deposit it for you here in the USA, or Canda, or where ever you want it transferred to. I know Indians have been doing it for years through a well developed structure of these intermediaries but evidently now the Chinese are doing it also. Of course, we see the results with them buying houses, etc like crazy.


I'm not exactly sure why they don't want to diverisfy in different assets in their own country, but there you have it.

Bangalore Equity Trader's picture


Indians and Chinese have "INTERMEDIARIES", Americans, and American Multinationals have "SHELL" Corporations.

Yen Cross's picture

Er derp a herp, China is goint to cut tax rates instead of pumping moar yuans into da syatem because M-1-2-3 demand is der flat.

 Hows der plummbing in Bull Paul?

KnuckleDragger-X's picture

The Chinese like tangible assets like gold and land. Their history has shown them that real assetts beat paper promises every time.

The Most Interesting Frog in the World's picture

In many cases the people that need to diversify are, 1) fucking criminals, and 2) understand full well the quicksand on which their China real estate miracle is built upon. These people are not stupid and shit the bubbly US markets must look like a value investment next to ghost city properties in China.

ebworthen's picture

"Bad Debt" would be a good band name for when newest sold-out generation comes of age.

The Most Interesting Frog in the World's picture

We could very well be witnessing a tectonic shift in politics like the early 80's when Reagan was elected. Young people shifted from very left wing to conservative from one generation to another. Unlike the 1980s, though, when the shift was to Wall Street, material wealth and corporatism, I wonder if this coming shift could be to a more Libertarian/Austrian agenda.

The 1980s and the Reagan revolution was really not a time of fiscal Conservatism, more a Republican bent on big government and a further merging of left and right. This time could be much different. I am hoping it is. The key is the young generations that are being sold out.

starman's picture

Credit = debt 

Expending credit is growing debt! 

The Most Interesting Frog in the World's picture

Yeah HTF is China supposed to rule the world when they are doing the same bullshit the other developed countries have been doing for decades? They are going to implode in spectacular fashion.

ekm1's picture

Another prediction of mine fulfilled.

I said several times that Politburo will bailout their own pyramic schemes, but not all of them, otherwise food inflation would go uncontrollable.


As the writer correctly points out, Reserves are one thing and Debt/Credit is another thing.

And that applies to all world money



Debt is self destructive

Reserves are not. Reserves must be MANUALLY extinguished

Bangalore Equity Trader's picture

Listen EKM1.

Haha. Exactly. Nice call. Extinguished!

AdvancingTime's picture

China is suffering from massive overcapacity. Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured huge amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need.

For years the people of China have had the habit of saving much of what they earn but the low interest rates paid at banks has not rewarded savers. With few investment options much of this money has drifted towards housing and driven housing prices sky high. The article below delves into how the economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be very painful.