After years of robust credit growth in the Mainland, the authorities may become more active in reducing the highly leveraged nature of the Chinese economy in 2018. The deleveraging process will likely proceed with the introduction of policy measures targeted at reducing the reliance on debt.
Credit growth remained robust
Despite the ongoing attempts by policymakers to restrain the leverage level of the Chinese economy, the momentum of credit expansion did not slow last year. During the first 11 months of 2017, new RMB bank loans and aggregate financing – including non-bank financing activities – reached RMB13,266 billion and RMB18,275 billion respectively, representing a 15.9% and 13% YoY expansion.
These trends have naturally drawn attention from market observers, including international organisations that had earlier issued warnings about the risks of a debt crisis in the Mainland.
Among others, the IMF recently suggested that the increasing complexity of the Mainland’s financial system “has sown financial stability risks.” The IMF also said that the rapid growth of non-bank financial institutions, such as asset managers and insurance companies, and the proliferation and increasing complexity of investment products, was a potential risk to the financial system.
Responding to such concerns, a series of measures were introduced (see Table 1), and we expect relevant authorities to become more diligent in reducing the leverage level in the Mainland.
Sources: Reuters, Fortune and Straits Times
Stricter controls over non-bank financing
Indeed, a notice issued on 5 January by the China Banking Regulatory Commission (CBRC), reminding banks not to be exposed to risks associated with their entrusted loan business, has reaffirmed top policymakers’ intentions. 
From our understanding, the entrusted loan business in Mainland commercial banks is generally not stringently regulated, which allowed it to expand 413% between 2008 and 2016.
In its notice, the CBRC instructed commercial banks not to provide guarantees or get involved in the decision-making process of entrusted loans, as these banks are only permitted to act as intermediaries in the entrusted loan approval process.
To prevent systemic risks, the CBRC noted that entrusted loans would not be eligible for investment in equities, bonds, derivatives or wealth management products. The commission also demanded that commercial banks implement more serious investigation of the legitimacy of relevant sources of funding.
Given the level of details, the notice – together with other reported measures – provides evidence that policymakers intend to focus on reducing excessive credit growth in the Mainland in the near term. We also consider these actions as reactions to the concerns raised by international agencies. These include the IMF, which suggested that risky lending behaviour had shifted away from banks – where lending has become increasingly regulated – “toward the less-well-supervised parts of the financial system.”
As President Xi Jinping and top policymakers have repeatedly emphasised that containing financial risks is a top priority for the Mainland, similar notices and stricter enforcement actions may be undertaken more regularly – and even become a new normal – in 2018.
 IMF (December 2017)
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