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EghtesadOnline: Chinese banks’ leverage fell for the first time in seven years as the government’s campaign to curb risks in the $40 trillion financial system started to bite.

The balances of both interbank assets and liabilities at the end of June declined by 1.8 trillion yuan ($270 billion) from the beginning of the year, the China Banking Regulatory Commission disclosed at a press conference on Friday. The outstanding amount of wealth-management products, especially those sold to other financial institutions, fell by a cumulative 1.9 trillion yuan, the regulator said.

According to Bloomberg, interbank lending and shadow-banking products are key targets in China’s push to rein in risks associated with its $28 trillion debt pile, a campaign that has also focused on overseas acquisitions by certain Chinese firms. Regulators embarked on fresh measuresfrom the beginning of April to step up scrutiny of shadow financing with a focus on unraveling interbank interconnectedness.

Since then, entrusted investments -- funds that Chinese banks get from issuing WMPs and then farm out to external asset managers -- declined by over 530 billion yuan, according to the banking regulator. Entrusted loans -- lending between corporates with banks as middlemen -- declined for the first time since 2008 in April and continued to fall in the next two months, the CBRC said.

In an earlier sign that the deleveraging campaign was taking starting to take effect, data from the central bank showed that shadow-bank financing shrank in July, the first contraction since October 2016. Growth in broad money supply slipped to a fresh low last month.

Meanwhile, earnings released by Bank of Ningbo Co. last week indicated that the smaller Chinese lender saw a sharp contraction in its second-quarter interest margins, a sign that the deleveraging efforts are hurting lenders that rely heavily on interbank funding.

Now characterized in state media as the “original sin” of China’s financial system, leverage has swelled over the past decade, partly because policy makers were then trying to cushion a slowdown in economic growth from the previous rate of more than 10 percent. What’s fueled the leverage has been a rapid expansion in household and corporate wealth looking for higher returns in a system where bank interest rates have been held down.

Financial regulators should strengthen coordination to crack down on regulatory arbitrage and step up punishment for violators, Yin Yong, a central bank vice governor, said at a forum on Saturday.

The nation needs to break the misconception of an implicit guarantee on investment products sold by state-backed entities, such as banks and local governments, and gradually reduce the level of interconnectedness in the financial segment to curb risks, he said.


China financial system China banks China Interbank Lending