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Shadow Banking Industry to Test PBOC’s Resolve

Rising stress in China’s $6 trillion shadow banking industry is testing central bank Governor Zhou Xiaochuan’s resolve to limit monetary easing as risks to the government’s growth target climb.

In the past three months at least 10 trusts backed by assets spanning coal mines in Shanxi to forests in Fujian have struggled to meet payments, sparking protests by investors outside banks that distributed their products. A slump in new credit in July underscored strains on the industry that funded as much as half of China’s recent growth, presenting Zhou with a choice: ease policy to avert a slowdown, or hold the line.

“The central bank faces a dilemma,” said Ding Shuang, senior China economist with Citigroup Inc. in Hong Kong. “On one hand, it’s part of the government and has to do what it can to aid growth; on the other, it knows better than any other government agency the danger of rising debt. It’s a tricky balancing act.”

Bloomberg [1]

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