China's entrusted loans plunge 3.5% in January-April as banks shun shadow finance

Shadow banking growth virtually stopped new contributions to total social financing.

China’s entrusted loans contracted 3.5% ytd in the first four months of 2018 as the country’s lenders are turning to bank loans and away from shadow finance, according to UOB Kay Hian.

Entrusted loans are loans made from one company to another which is common in China where direct borrowing and lending between commercial enterprises is restricted. However, entrusted loans are not included in the balance sheets of agent banks or trustees since they do not assume credit risks, which make it prime for shadow banking activity. 

Beijing’s widespread crackdown to rein in risk in the financial sector is yielding results as the contribution of entrusted loans to new increase in total social financing (TSF) contracted 5.9% in Q1.

Also read: China's shadow banking crackdown buoys offshore financing market

The authorities have embarked on efforts to prevent financial risks and reduce leverage since 1Q17. TSF has further slowed to growth of 10.5% yoy in April, compared to 12% yoy in December, said analyst Jonathan Koh.

“Growth in shadow banking slowed since 2Q17 and virtually stopped contributing to new increases in TSF in 1Q18,” he added.

Also read: China's RRR cut cushions lenders against impact of shadow banking crackdown

As the economy continues to turn to on-balance sheet activity, Koh expects loan growth to clock in a stable levels in the coming years as the proportion of new increase from bank loans hit 87.8% in Q1.