China's shadow banks, increasingly wary of lending into a slowing economy, have turned to the stock market, fuelling a surge in unregulated margin lending that has driven the market's dizzying gains over the past year.
Now regulators are cracking down on shadow lending to stock investors, a campaign analysts say is partly to blame for last week's 13 per cent fall in the Shanghai Composite Index — the largest weekly drop since the global financial crisis in 2008.
"The price of funds has increased, the flow has shrunk, and transaction structures are getting more complicated," says a Chongqing-based shadow banker who provides grey-market loans to stock investors.
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