Could China's 2014 Economic Growth Drop Below 7 % Due to Lending Crackdowns?

China's economic growth could drop below 7% this year after government documents revealed plans for a crackdown on risky lending.

Cabinet officials published guidelines last month strengthening the regulation of lending over the internet and imposing tougher rules on trust businesses that have lent £1.8tn to local authorities in recent years.

Beijing is keen to address growing financial risks from an explosion in debt and appears ready to accept the sharp slowdown in growth that could follow the decision to enforce lending limits on the shadow banking industry.

A fall from last year's estimated 7.6% GDP growth to below 7% could have serious consequences for the economy and social stability, especially after riots in 2012, which were directed at Japanese goods but were triggered by a sharp slowdown in output and wages.

The state council's guidelines call for tighter regulation of banks' off-balance-sheet lending and say that trust companies should return to their original purpose as asset managers and not engage in "credit-type" business.

A copy of the council's document 107, dated 11 December, was obtained by Reuters. There has been no official confirmation of the document, which was addressed to government agencies at the central and local level.

Analysts at Société Générale said a growth rate of 6.9% was likely even without the crackdown: "We suspect that the [story] is a trial balloon to gauge the potential response of financial institutions, so probably still open to further revisions.

"However, the policymakers have been clear about their intention to contain unruly growth of the shadow banking system by maintaining relatively tight liquidity conditions since mid-2013, and by issuing rounds and rounds of targeted regulations over the last three years.

"Some over-arching policy guidance, as the one reported, has always only been a question of when."

Liu Yuhui, a director at the Chinese Academy of Social Sciences, a government thinktank, said: "If this isn't accompanied by various forms of debt restructuring, some sectors may see their funding chains broken and there could be defaults."

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