Crackdown on shadow banking to ease: Moody's

China’s crackdown on shadow banking will ease in 2019, but the sector will not rebound strongly, said Moody’s Investors Services in its latest report on Monday.

The shadow banking sector shrank by 4.3 trillion yuan (US$640 billion) in 2018 to end the year at 61.3 trillion yuan, its lowest level since the end of 2016, just before regulators tightened controls.

Shadow banking refers to activities performed by non-bank financial intermediaries outside the formal banking sector. Subject to less regulatory oversight it represents a higher risks.

The contraction was  led by reduced core activities including trust loans, entrusted loans and undiscounted bankers’ acceptances — a promised future payment, or time draft — which saw a combined decline of 2.9 trillion yuan, Moody’s said.

The broad shadow banking sector as a share of GDP dropped by nearly 20 percentage points to 68 percent at the end of 2018 from its peak of 87 percent two years ago.

Interconnectedness among financial institutions also declined in the year, as outstanding wealth management products purchased by interbank investors slipped 63 percent.

Although the de-leveraging and de-risking campaigns in China through 2018 made progress in reducing the interconnectedness within the financial system, they also reduced the access of privately owned enterprises to credit and impacted overall economic growth, said Michael Taylor, a managing director and chief credit officer for Moody’s Asia Pacific business.

Private businesses have experienced the greatest disruption to funding availability due to the shadow banking crackdown and companies with different credit profiles are facing greater differentiation in their access to credit.

Micro and small enterprises with strong credit profiles have enjoyed improved access to credit while those with weaker fundamentals still find it difficult to seek new funding, although the government has pushed for enhanced financial support for private enterprises since the last quarter of 2018, the report noted.

For this year, Moody’s does not expect a rapid rebound in shadow credit supply as it believes authorities in the world’s second largest economy will retain their focus on financial system risks.

There are signs that China’s policy priorities are shifting toward sustaining growth and a slower pace of de-leveraging.

The 2019 government work report recently delivered by Premier Li Keqiang during the “Two Sessions” aims to maintain stable economy-wide leverage, while keeping credit growth more aligned with nominal GDP growth, Moody’s said.