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Banking & Finance

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

Sector also becoming increasingly interconnected with the formal banking system, warns ratings agency in new report

PUBLISHED : Tuesday, 13 December, 2016, 2:28pm
UPDATED : Tuesday, 13 December, 2016, 10:34pm

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.

“A deterioration in the asset quality of banks is taking place against the backdrop of a deceleration in GDP growth and rising financial leverage, ” Hung said.

A deterioration in the asset quality of banks is taking place against the backdrop of a deceleration in GDP growth and rising financial leverage
Sean Hung, analyst and vice president, Moody’s

He also warned that the liabilities of state-owned enterprises (SOEs) had increased and reached nearly 120 per cent of GDP at the end of September, adding that mid-size and small banks are increasingly becoming reliant on wholesale funding to support their longer-term investments, challenging their ability to manage liquidity.

Nonetheless, despite holding back on further monetary policy loosening or interest rate hikes, overall liquidity in the Chinese banking system will remain stable, he said.

China recently launched trial programmes and tightened regulations in an effort to rein in corporate debt, including a proposed debt-to-equity swap programme that allows banks to hold equity stakes in SOEs.

Moody’s also said in its commentary it was confident the government’s corporate deleveraging measures would help address an unsustainable trend of rising debt, but cautioned too that the increase represented an adjustment in risk for the banks in the near term, by raising corporate defaults and loan restructurings.

“The banks may loosen their hold on company assets if they have swapped debt for equity,” the report said, “a risk, that in the case of unviable companies collapsing, will prove more expensive for the banks involved”.

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