China fights hard battle against shadow banking – People’s Daily Online

SHANGHAI, June 29 (Xinhua) — With interbank borrowing rates tumbling, China’s financial sector is getting relief from a credit crunch partially engineered by the central bank’s moves to impose financial discipline amid the runaway expansion of shadow banking.

But as regulators remain committed to a tight policy stance, the credit crunch could be just the beginning of the pain caused by curtailing shadow banking, a bandage necessary for ensuring the health of the financial system of the world’s second largest economy.

The cash shortage, which pushed interbank rates to double digits last week, ate up banks’ profits and erased trillions of yuan in the stock market. The People’s Bank of China later calmed market panic and drastically reduced banks’ borrowing costs to normal levels. However, analysts say that does not indicate a policy reversal, as regulators are keen to squeeze financial bubbles.

Shadow banking, the value of which J.P. Morgan has estimated at 36 trillion yuan (5.86 trillion U.S. dollars), is believed to be focus of the deleveraging process. In an economy that relies heavily on credit expansion, such tightening measures will further weaken China’s economic growth, which has already slumped to its lowest level since the Asian financial crisis.

While institutes like Goldman Sachs, IMF and Standard&Chartered have trimmed their forecasts for China’s growth on concerns of monetary tightening, they have also maintained that the short-term pain of squeezing bubbles could push China’s economic growth toward a more sustainable model.