Total credit growth remained weak in August and underlying credit growth was just 10.0% annualised in July and August, suggesting that China could finally have reached the stage where credit growth is broadly in line with nominal GDP growth.
Growth in shadow finance slowed further in August and underlying growth in shadow finance was just 9.4% annualised in July and August. Growth in shadow finance now appears to be less than that in ordinary bank loans. Within shadow finance, loans from trust companies in August contracted for the second consecutive month. The sharp slowdown in trust loans has partly been offset by stronger corporate bond issuance, albeit corporate bond issuance also slowed slightly in July and August.
The sharp slowdown in loans from trust funds means that companies dependent on trust loans such as small- and medium-sized developers could face very difficult refinancing conditions and possible default. The sharp slowdown in trust loans is the most important source for possible negative credit event risk in China in the short run.
So far, there are no signs that the weaker credit growth is being perceived as an increased systemic risk for financial markets in general. Most of our indicators for credit risk in the interbank market have been stable or declining slightly.
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