China’s Stock Crash Is Spurring a Shakeout in Shadow Banks

By Bloomberg

China has been struggling to tame its shadow banks for years. Now, a stock market crash has hamstrung some of the fastest growing ones in a matter of weeks.

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Loans from sources such as online lenders for equity purchases have plunged by at least 700 billion yuan ($113 billion), a drop of 61 percent from this year’s peak, after authorities banned them from funding stock buying in July, according to a Bloomberg survey conducted last month. Peer-to-peer Internet lending for the purchases had more than tripled to 8 billion yuan in the second quarter, data from research firm Yingcan Group show.

The reversal has helped cull riskier lenders in China’s online market, which was surging before the equity rout wiped out more than $4 trillion. President Xi Jinping has already curbed traditional forms of unregulated funding — such as trust loans — as part of his effort to wean the economy from debt-fueled growth after corporate defaults mounted.

“The new regulations are making the industry more disciplined and transparent,” said Wei Hou, a senior equity analyst for Chinese banks at Sanford C. Bernstein Co. “There may be short-term pain of a number of small players closing down. But it’s good for the industry in the long term.”

New Rules

Peer-to-peer lending was pioneered in the U.S. by companies such as LendingClub Corp., but China is where it’s really taking off. Origination of such loans totaled the equivalent of $41 billion in 2014 and will exceed $332 billion by 2017, according to Maybank Kim Eng Securities Pte. That compares with only $6 billion in the U.S. last year.

While China’s benchmark Shanghai Composite Index rose 2 percent Friday as of 2:50 p.m. in Shanghai, it remains down 28 percent from its high for the year marked in June.

The China Securities Regulatory Commission said on


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