Banking & Finance

China’s shadow bank lending balloons to 58trn yuan, as focus shifts to risks from fintech platforms

Mid-year data compiled by Moody’s shows that the shadow banking sector is equivalent to 82 per cent of the Chinese economy, prompting concern new internet lending platforms need tighter supervision

PUBLISHED : Thursday, 27 October, 2016, 11:45pm
UPDATED : Thursday, 27 October, 2016, 11:49pm

China’s shadow bank lending has grown to more than 80 per cent of the economy, fuelled partly by off-balance-sheet lending originating from lightly-regulated fintech platforms, prompting warnings from analysts of potential risks arising from insufficient supervision.

Moody’s research released on Thursday showed that lending via the shadow banking system grew by 19 per cent annualised in the first half to reach 58 trillion yuan (HK$66.37 trillion), or a 82 per cent of GDP.

“The number itself looks not that large compared to other economies like the US and Britain. But the speed of growth, particularly of the less transparent wealth management products (WMPs) is fueling concern that it is becoming more difficult for state banks to replace the current credit,” said Michael Taylor, managing director and chief credit officer for Asia Pacific at Moody’s.

Many economists believe the US shadow banking sector accounts for around 150 per cent of GDP as of end 2015.

Leverage continues to increase throughout the Chinese economy. Total social financing (TSF), a measure of broad credit, has risen to an estimated 220 per cent of GDP at the end of the third quarter, up from 206 per cent of GDP at the start of year, Moody’s said.

“Credit flows are being sustained by bank lending, especially mortgage loans, and a revival in corporate bond issuance... however, some of the fastest growing shadow banking components

are not included in TSF,” the report said.

Assets funded by WMPs have been an especially fast growing component for the shadow banking sector, accounting for 44 per cent of the stock of shadow banking finance as of the end of the first half, Moody’s said.

Wu Xiaoqiu, vice president of China’s Renmin University, also a renowned financial securities scholar, said the off-balance-sheet lending, or shadow banking, is integrating with internet-based selling and marketing, a lightly-regulated sector under the current regulatory regime.

“As for regulating fintech, the regulators have been spending most of their energy in clearing out peer-to-peer (P2P) chaos and fraud, but the fintech business in China is far more than just P2P lending now, and the insufficient supervision will leave potential risks,” he said.

Chinese financial website Caixin reported on Tuesday that some financial insiders believe the People’s Bank of China may soon require commercial banks to incorporate off-balance-sheet wealth-management products into the Macro Prudential Assessment (MPA) system, as a way to improve oversight of shadow lending.

However, some analysts believe the impact would be limited.

According to MPA, the broad credit loan growth rate should not deviate from the target growth rate of M2 by more than 22 per cent.

Analysts from investment bank China International Capital Corp said that penalties for violating the MPA needed to be beefed up to act as an effective deterrent.

Meanwhile, Moody’s highlighted the risk of a potential systemic shock in its own report.

“Problems that emerge in the shadow banking sector, to which mid-and small-sized banks are particularly exposed, could lead to liquidity shocks that can be transmitted more easily to the rest of the banking system through the interbank market,” Moody’s said.