A Chinese government campaign to cut leverage in the banking system and limit some risky activities appears to be working, but it is also pushing borrowers back towards alternative funding sources that carry similar risks to the financial system.

First-quarter official data shows banks cut the amount they lent to and borrowed from other financial institutions by 1.4 trillion yuan (0.16 trillion pounds) and 1.9 trillion yuan, respectively, to 21.7 trillion yuan and 30.3 trillion yuan. The growth in bank wealth management products (WMPs), a key component of shadow banking credit, slowed to 19 percent year-on-year, down 35 percentage points.

Bankers said the slowdown came as the People’s Bank of China (PBOC) tightened liquidity conditions, which pushed up the cost of borrowing, and included off-balance-sheet WMPs in its macro-prudential assessment of banks’ risk levels for the first time.




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