Beijing is cracking down on shadow financing channels to reduce funding costs for borrowers, as China’s overall debt burden continues rising. Borrowing costs throughout the economy consistently exceed investment returns. The campaign against shadow banking is now turning to Internet financing – platforms helping banks to grant loans to small businesses and retail consumers. Last week’s new cap on the private lending rate at four times the LPR rate was set below rates on many shadow financing loans. But without addressing high funding costs and growing credit risks, bluntly cutting lending rates through administrative orders will pressure financial institutions and reduce credit growth and economic activity, particularly for private firms.
