Private Debt Investor

March 28th, 2019

by Adalla Kim

A decline in ‘shadow banking’ has led to a reduction in primary lending and a growing funding gap in the People’s Republic

Private credit fund manager OCP Asia is refocusing on the corporate funding gap in China after asset management companies and ‘shadow bankers’ reduced their lending activities during 2018.

‘Shadow banking’ refers to activities performed by financial services companies that lie outside the formal banking sector, and that are therefore subject to lower levels of regulatory oversight and higher risks.

Dan Simmons, a Hong Kong-based partner at the firm, told PDI: “We are focusing on the fact that AMCs [asset management companies] have pulled out of primary lending, which has created a capital hole.”

Although OCP Asia has not closed any transaction in this space in 2019, it has made numerous loans to Chinese companies with both onshore and offshore collateral. Typical borrowers are small and mid-sized enterprises with EBITDA ranging from $25 million to $125 million.

PDI understands that Orchard Landmark III – OCP Asia’s latest closed-ended fund, which has more than $500 million of commitments – has deployed as much as 40 percent of its capital.

Simmons’ view is echoed in Moody’s latest report, Quarterly China Banking Monitor, which was published on 19 March. It says that other than assetbacked bonds and leasing loans, there has been a reduction in activity by companies involved in broad-based shadow banking.

According to George Xu, a Hong Kong-based analyst for credit strategy and standards at Moody’s, the rapid increase in shadow banking activities during this period was worrying: “I think that is why the regulators took coordinated measures to curb key shadow banking drivers since the end of 2016.”

Chinese regulators have taken measures relating to shadow banking with a view to limiting systemic risk. On 27 April 2018, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange jointly released finalised regulatory guidelines for banks’ and nonbanking financial institutions’ asset management businesses. The guidelines, Guidance Opinions Concerning Standardisation of Asset Management Operations by Financial Institutions, aimed to curtail regulatory arbitrage activities.

Industry analysts and researchers have pointed out that the current regulatory framework for shadow backing in China has reduced privately owned companies’ access to credit, and that this has had an impact on overall economic growth.

Nicholas Lardy from Peterson Institute for International Economics, a Washington, DC-based non-profit thinktank, said on 28 January that China’s leadership had consistently backed state-owned enterprises.

“In reality, [China’s leadership] has doubled down on the industrial policy and has expanded the role of state enterprises,” he said. Lardy added that Beijing was “really squeezing out private firms which were the source of most of the growth of the economy” since market reforms were first introduced in the country in 1978.