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According to reporting by Bloomberg, China still has a long way to go before reaching the bottom on their $10 trillion shadow banking sector. Following headlines in the Chinese press that China may face a liquidity crunch in June or July, Chinese banks hungry for funding are continuing to find creative ways around lending and asset curbs.

Chinese regulators are making progress in their attempts to tame the country’s $10 trillion shadow banking sector, but after a one-year squeeze on the riskiest areas of the industry, there’s still a lengthy battle ahead.  The best measure of success is last year’s reversal of the surge in shadow banking assets as a proportion of gross domestic product. After doubling over the past five years to reach 87 percent of GDP in 2016, the ratio slipped back last year to 79 percent, according to Moody’s Investors Service.  Two key prongs of the shadow banking campaign have been a clampdown on sales of high-yield asset management products, and an attempt to reduce the hidden inter-dependencies between financial institutions. After explosive growth between 2010 and 2016, wealth management products sold by banks barely increased in 2017. And the slight drop in banks’ borrowings from other financial firms this year is another measure of regulators’ success, albeit a modest one so far.  A key element of the campaign against asset management products is a ban on providing implicit guarantees for the riskier offerings to Chinese savers. Instead, banks have boosted their issuance of structured deposits with derivative features, many of them with embedded options that are unlikely ever to be exercised, as a way of continuing to offer high yields to depositors.  That helped boost issuance of structured deposits almost 47 percent to a record 8.8 trillion yuan ($1.4 trillion) in the year through March, according to official data. More than 1.8 trillion yuan of the new stockpile was added in 2018.

 – Bloomberg