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Crack Down on Shadow Banking in China to Impact Supply of Credit to Real Economy

The impact of stricter regulations in China is impacting its shadow banking sector, including slowing the aggregate growth of entrusted loans, trust loans and undiscounted bankers' acceptances, according to a new Moody's Investors Service report. Financial flows to the nation's social financing will be reduced this year as a result.

"What started as a regulatory crackdown on some previously fast-growing shadow banking segments—such as the banks' wealth management products and nonbank financial institutions' asset management plans—has spread to other major core shadow banking components," said Michael Taylor, a Moody's managing director and chief credit officer for Asia Pacific. "The effect of intensified regulation is no longer limited to de-risking the financial sector, but is now beginning to impact the supply of credit to the real economy."

During 2017, Moody's figures that shadow banking assets increased at a 10th of the amount of the previous year, expanding by $173 billion versus $1.77 trillion in 2016. "Shadow banking activity also declined as a percentage of GDP for the first time since 2012, falling to 79.3% at the end of 2017, compared to the peak of 86.7% at the end of 2016," said George Xu, a Moody's analyst.

Declines in the banks' wealth management products, and nonbank financial institutions' asset management plans—the focus of the Chinese authorities coordinated regulatory actions since the second half of 2016—drove the decline, Xu said.

More recent regulatory actions have focused on core shadow banking activities, which have been a growing source of credit supply to the real economy in 2017. "These measures will likely reduce the supply of credit to more marginal borrowers, who are most dependent on shadow finance," said Xu. "Consequently, refinancing risks are increasing for some sectors, such as property developers, local government financial vehicles, and companies from overcapacity and polluting industries."

Liquidity conditions will continue to tighten for Chinese financial institutions, especially for smaller banks and nonbank financial institutions, Moody's said. The People's Bank of China has thus expanded direct lending to the banks with an increasing use of medium-term liquidity facilities.

Smaller property developers and local government financing vehicles may now be turning to the offshore market for funding, the ratings agency said.

– Nicholas Stern, managing editor

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Thursday, 20 June 2024

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