China's shadow banking activity continues to contract: report

Shadow banking activity in China continues to contract, with formal bank lending dominating the new supply of credit in the first half of 2018, according to the latest report from Moody's Investors Service.

Broad shadow banking assets as a share of the country’s gross domestic product dropped to around 73 percent at the end of June 2018 from 79 percent at the end of 2017, and the peak of 87 percent at the end of 2016. In absolute terms, shadow banking assets fell by 2.7 trillion yuan (US$390 billion) in the first six months to 62.9 trillion yuan.

Driven by a contraction in core shadow banking activities including entrusted loans, trust loans and non-discounted bankers’ acceptances, China’s overall credit growth continued to slow in the second quarter, Moody’s said.

The report noted that with reduced supply of shadow credit, formal bank lending dominated the new supply of credit in the world’s second largest economy, accounting for 96 percent of new total social financing flows from January to June.

The rating agency noted that despite expansion in overall bank credit, lenders remain reluctant to lend to marginal corporate borrowers with weak credit fundamentals that previously had relied on shadow finance, which resulted in an elevated refinancing risk to those clients.

Moody’s expects the decline in China’s shadow banking assets to moderate in the rest of 2018, as regulators are taking a more gradualist approach in response to the nation’s slower credit growth and a more challenging external environment.

The top financial watchdog has stepped up its efforts to increase banks’ lending capacity and their investment in corporate bonds, with regulations governing broad asset management business and banks’ wealth management products being applied more leniently.

Moody’s said that it believes China’s overall policy objectives of containing financial risks and deleveraging will remain intact.