China’s shadow banking system expands to 82pc of GDP: Moody’s

Assets held in China’s shadow banking system have doubled in size in the last five years, and were equal to 82 per cent of gross domestic product (GDP) at the end of June, according to Moody’s Investors Service.

The sector is also becoming increasingly interconnected with the formal banking system, the ratings agency said in a new report on Tuesday, with the value of outstanding wealth management products issued and distributed by banks – included as part of the shadow banking contribution – continuing to expand, and are now worth 37 per cent of GDP.

Separately, wealth management product accounted for 41 per cent of the wholesale investment market, up from 32 per cent at the end of 2014.

Sean Hung, an analyst and vice president at Moody’s said the rising level of interconnectedness between the formal banking system and the shadow banking system presented “another source of risk (for Chinese banks)”.

He also warned the Chinese banking system is facing increasing levels of bad loans, while credit costs are also rising.

The Moody’s study shows non-performing loans (NPLs) in Chinese banks accounted for 1.76 per cent of gross loans at the end of September, up from 1.67 per cent at the end of last year and 1.25 per cent at the end of 2014.