China's Shadow Banking Sector Faces Scrutiny Post-Crackdown

China's crackdown on local government borrowing is spotlighting its shadow banking sector, raising concerns about financial stability and credit availability. According to the South China Morning Post, state-run entities in wealthy provinces are increasingly tapping into expensive credit from non-bank lenders, as this funding option becomes necessary due to stricter fiscal policies.

These loans, often from trust companies and leasing firms, are carrying interest rates of 8% or higher, significantly above the bond market rates, which has led to rising risks within an already opaque financial system.

The surge in borrowing reflects the impact of Beijing’s campaign to curb debt accumulation through local government financing vehicles, leaving many firms with no choice but to refinance at these high rates.

Experts, like Jacqueline Rong from BNP Paribas SA, suggest that the tightening of fiscal discipline is a key reason behind falling infrastructure investments in the world’s second-largest economy, as firms struggle to manage increasing debt obligations without access to cheaper funding options.