China's banks are sidestepping the shadow banking crackdown

Issuance of structured deposits surged almost 47% to $1.4t in the year through March.

Bloomberg reports that China’s efforts to rein in activity in the country’s $10t shadow banking sector is facing resistance from banks themselves who have been devising inventive ways to sidestep the intensified scrutiny.

Banks have been ramping up issuance of structured deposits with derivative features as a way of giving depositors high-yield products despite the ongoing crackdown. In fact, issuance of structured deposits surged almost 47% to a record $1.4t (8.8 yuan) in the year through March with more than 1.8t yuan of new stockpile added this year alone.

Lenders have also been pivoting towards the offshore market to finance their operations as they shift away from shadow finance to on-balance-sheet financial products, according to a report from Moody’s Investors Service.

"There are limits to which the banks can substitute for the decline in shadow credit, a condition which could result from their own capital and liquidity constraints and underwriting processes more stringent than those of the shadow banking sector," said George Xu, a Moody's analyst.

Elsewhere, however, Beijing has made considerable headway in denting shadow finance as the country's banking system assets plunged from 16.5% in 2016 to 8.7% in 2017 to represent the first drop to single-digit growth in more than a decade reflecting the ongoing transition of banks to on-balance-sheet activities like loans.

Loan growth clocked in at a steady 12.1% which makes last year the first year since 2013 that loan growth has outpaced asset growth.

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