China's Renewed Drive to Tame Its Debt Pile Starts to Bite

(Bloomberg) -- Signs are emerging that the Chinese government's renewed drive to curb financial leverage is starting to bite.

The number of wealth-management products issued by Chinese banks slumped 39 percent in April from the previous month, while trust firms distributed 35 percent fewer products, according to data compilers PY Standard and Use Trust. Sales of negotiable certificates of deposit, a popular instrument of interbank lending known as NCDs, tumbled 38 percent from a record, figures compiled by Bloomberg show.

The system-wide contraction is a result of a flurry of government measures over the past month that included ordering banks to bolster risk controls, stepping up scrutiny of shadow financing and cracking down on malfeasance among senior bureaucrats. While the moves have rocked China's financial markets, the government is sending a clear signal of its determination to curb the estimated $28 trillion debt pile that poses a risk to economic stability.

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“The government is doing the right thing to carry out the deleveraging efforts now,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “It seems the growth momentum currently can still absorb the negative impact of deleveraging, and that in turn provides the room for the deleveraging to continue.”

The Chinese economy has grown for two straight quarters, though a bigger-than-expected drop in the official factory order gauge this week took the shine off a recent run of solid data points. The decline in the purchasing managers index is another indication of the delicate balance the government faces in maintaining growth, while curbing the leverage that helped fuel that expansion.

Market Rout

The recent regulatory moves erased more than $300 billion of stock-market value and sent bond yields to the highest level in nearly two years as investors speculated the crackdown will curtail the amount of funds available for investment in financial markets.

It's a valid concern: Chinese banks sold 5,989 wealth-management products last month, down from March's 9,829, which was the highest since at least December 2015, according to PY Standard, a Chengdu-based financial data provider.

Meanwhile, trust companies raised about 80 billion yuan from selling 543 products in April, compared with the 189 billion yuan raised from 835 products in March, according to Use Trust, which is based in the city of Nanchang.

Sales of NCDs, which have become increasingly popular among smaller banks as a funding source, tumbled to 1.32 trillion yuan in April from a record 2.2 trillion yuan a month earlier, according to data compiled by Bloomberg.

The impact of the regulatory crackdown has already turned up in bank profits after the measures drove interbank borrowing costs to a two-year high. First-quarter results announced last week showed that net interest margins for some smaller banks contracted, while margins for net lenders on the interbank market expanded.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net, Helen Sun in Shanghai at hsun30@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Darren Boey, Sree Vidya Bhaktavatsalam

With assistance from Jun Luo, Helen Sun