China’s Shadow Banking Assets Grow to 64.5 Trillion Yuan in 2016: Moody’s

(Beijing) — Growth in China’s shadow banking activities has slowed since the latter half of 2016, amid stepped up efforts by regulators to crackdown on risky practices, rating agency Moody’s Investors Services said Monday.

Tightening liquidity in financial markets has also meant less money has been flowing into the sector, which some analysts say has too much leverage, creates dangerous asset-liability mismatches and reduces transparency.

China’s shadow banking assets grew to 64.5 trillion yuan ($9.4 trillion) in 2016, an increase of 21% compared with a year earlier, according to the report released on Monday. Its growth has slowed markedly from the 30% year-on-year increase recorded in 2015.

But shadow banking assets still accounted for 87% of the country’s GDP and 28.5% of total banking assets in 2016.

Moody’s uses a very broad definition for shadow banking activities. It includes entrusted loans, trust loans and undiscounted bankers’ acceptances that are included in the monthly report on total social financing by the central bank, which offers a broad measure of China’s credit lending. Moody’s also takes into account assets funded by bank wealth management products (WMP), loans by finance companies, and other lending activities such as peer-to-peer lending and asset-backed securities.

The China Banking Regulatory Commission (CBRC) stepped up efforts in April to control major financial risks including those associated with shadow lenders. The banking industry watchdog issued a series of regulations, targeting assets lent to external managers in so-called “entrusted investments” and other interbank operations involving multiple layers of credit transactions. They also aimed to rein in risks linked to the WMP business and the property sector.

As a result of the intensified efforts to deleverage the Chinese economy, over $450 billion in value has been wiped from the country’s stock and bond markets since mid-April. The monthly weighted average interest rate of pledged repo transactions in China’s interbank market was up to 3.51% in March from 2.49% from the same period a year ago, according to data compiled by Wind, a Chinese financial information provider. The Moody’s report suggested that the spread between WMP yields and one year benchmark deposit rates have further widened.

During a liquidity shock, small- and mid-sized banks were more likely to collapse because they have invested a large portion of their funds in trust and asset management programs managed by non-bank financial intermediaries to boost profitability, and to circumvent capital restrictions on lending, Moody’s said.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)