CHINA RISKS REAL HARD LANDING THIS TIME / THE WALL STREET JOURNAL

China Risks Real Hard Landing This Time

Beijing’s crackdown on shadow banking has gone overboard. Some backtracking looks necessary.

By Nathaniel Taplin

China’s economy is at risk of its long-feared “hard landing”—a rapid slowdown in growth that would hit employment hard and could trigger big problems in global debt and currency markets.

The reason isn’t, as the Trump administration would like to believe, the U.S.’s trade offensive. Instead, Beijing has overdone its own crackdown on nonbank “shadow finance”—without opening alternative channels for private-sector borrowers, who often struggle to obtain bank credit. As a result, Chinese credit growth has continued to decelerate, despite nine months of significant central bank easing. If it doesn’t turn back up soon, producer-price inflation could turn negative—causing big problems in the heavily indebted industrial sector.

The mushrooming of Chinese shadow banking was an unfortunate, but necessary, byproduct of a banking system that has grown more state dominated since 2010. Private companies account for about two-thirds of the economy but receive only about a third of net new lending. It’s little wonder they have turned increasingly to unofficial channels to get loans.






Last year’s shadow banking crackdown has therefore created a lending bottleneck. Even though banking-system liquidity is ample, state-owned banks still aren’t directing money to credit-hungry corporate borrowers, leaving it sloshing around the financial system instead. Turnover in China’s interbank lending market was 21% higher in the fourth quarter than a year earlier.



In past easing cycles, China’s central bank typically cut benchmark interest rates or reduced the amount of cash banks must hold in reserve, stoking a pickup in borrowing by companies and households a few months later. Not this time. Despite several big reserve ratio cuts and sharply lower benchmark interbank rates, growth in net nonfinancial fundraising had declined to 9.8% in December, its lowest in more than a decade.






Private sector borrowers can find it hard to get bank credit. Pictured, a shop owner waits for customers on the outskirts of Beijing, in 2017. Photo: nicolas asfouri/Agence France-Presse/Getty Images 


In other words, in the past year, banking-system liquidity has risen by about a fifth, but net credit growth has fallen by about a third. The reason is clear. Shadow finance outstanding fell by a full 10% in 2018—by far the sharpest contraction on record.

Regulators realize they have a problem. They are now trotting out new central bank lending facilities to goad banks into extending credit to small enterprises. And the economy still has some cushions. Infrastructure investment is rising again. Consumers are struggling, but less than headlines would suggest.

Both of these bulwarks aren’t as strong as a couple of years ago—consumers are more indebted and a separate campaign against off-balance sheet infrastructure fundraising is still crimping investment. If the property market falls apart, China will be in serious trouble.

China’s inefficient financial system has long needed surgery. By excising the shadow banking system without a proper transplant to replace it, regulators risk killing the patient.