China's Shadow Banks Under Scrutiny Following Debt Crackdown

China's crackdown on borrowing by local governments is forcing state-run entities in wealthy provinces to seek costly credit from non-bank lenders, according to the South China Morning Post. This trend marks a resurgence of China's shadow banking market, which had previously been curtailed to mitigate financial risks.

Since September, local government financing vehicles in provinces like Shandong have borrowed billions from trust companies and leasing firms, facing interest rates exceeding 8 percent, more than triple the cost of borrowing in the bond market.

The increased borrowing is a direct consequence of Beijing's efforts to restrain provincial debt accumulation, leading to a significant reduction in access to cheaper funding options such as traditional bank loans and bond sales.

Jacqueline Rong, chief China economist at BNP Paribas SA, noted that stricter fiscal discipline may be causing a notable downturn in infrastructure investment. As interest payments escalate and project costs are due in the fourth quarter, these firms are compelled to refinance at elevated rates to maintain operations and avoid defaults.

Requests for comments from China's Ministry of Finance, the National Financial Regulatory Administration, and Shandong's government press service went unanswered.