The real reason for China's crackdown on Shadow Banking
BEIJING-- China's weakest real estate developers may face a credit crunch this year if the central government props up efforts to rein in "shadow banking" activities, Standard & Poor's said in a report on Thursday.
Non-banking channels such as trust financing have become major sources of funding for developers as the Chinese banking regulator imposes strict rules on credit issuance to property-related industries.
"Differences between the costs and the availability of funding are likely to continue to widen between large and small developers," said Standard & Poor's credit analyst #$%$ Bei. "Weaker developers may become targets of mergers and acquisitions to obtain liquidity support."
Meanwhile, the rating agency believes the largest developers have sufficient fundamentals to absorb a potential credit squeeze, especially after strong sales in the first half of this year increased liquidity buffers.
"Major players appear to have sufficiently healthy liquidity for the next six to 12 months, at least. For some developers, strong sales have refilled their war chests for land acquisitions and expansion," #$%$ said.
Despite strong efforts to curb housing markets, China has been unable to significantly slow housing. Both building them and selling them. IMO, because shadow banking keeps finding ways to finance them. China is used to implementing policies and seeing desired results much faster than this. So, the crackdown on shadow banking and the liquidity crunch earlier this year.
As I've often suggested, with China, it's always about how to curb and control growth that would stampede otherwise, whereas in the US it's about how to improve growth short of a $20 trillion national debt and a $4 trillion fed balance sheet.
The answer is policies that foster the formation (or attraction of) and deployment of investment capital.
China's 32% savings rate (necessary if you're going to survive past retirement), reasonable tax structure and 7.5%-plus growth rate is a powerful incentive to invest, but it's much more concentrated in individuals or partnerships (eg: VIPs) rather than traded capital markets given that the stock market is less trusted. S.