Shadow banking back in vogue in China as assets grow for the first time since 2017
- Shadow banking assets grew 100 billion yuan (US$14 billion) to 59.1 trillion yuan (US$8.4 trillion) in the first quarter of 2020, according to a report from Moody’s
- China had been tightening its control over off-balance sheet lending by banks since 2016 to curb financial risks, but credit growth is needed to rescue the coronavirus-hit economy
Informal lending by Chinese banks, so-called shadow banking, is back in vogue after two and half years of regulatory clampdown as Beijing pledges faster credit growth to rescue its coronavirus-hit economy, according to a new report.
Overall shadow banking assets in China rose for the first time since 2017, a report published by American business and financial services company Moody’s on Wednesday showed.
The report detailed how shadow banking assets in the world’s second largest economy grew 100 billion yuan (US$14 billion) to 59.1 trillion yuan (US$8.4 trillion) in the first quarter of 2020, compared with a 1.2 trillion yuan decline to 60.2 trillion yuan during the same period in 2019.
Increased policy focus to support economic recovery will fuel further expansion of shadow credit. However, a rapid rebound is unlikely as financial systemic stability still remains one of the authorities’ main policy objectives
“Increased policy focus to support economic recovery will fuel further expansion of shadow credit. However, a rapid rebound is unlikely as financial systemic stability still remains one of the authorities’ main policy objectives,” Moody’s said.
Wealth management products, which are essentially off-balance-sheet substitutes for deposits without the regulatory interest rate ceilings offered by banks to savers, were a big driver to the growth of shadow credit in the first quarter, Moody’s said.
Issuance of wealth management products with investment terms of three months or less rebounded to 43 per cent of the total volume in the first three months of 2020, the highest increase since the second quarter of 2018.
The deterioration in trust asset quality will likely continue for the rest of the year as trust borrowers’ financial performance remains under pressure amid slowing economic growth
Wealth management products constitute the largest shadow banking segment in China and are often invested in a range of loans and securities that have high exposure to speculative areas such as real estate and stocks or funding weaker borrowers.
The central government has sought to balance the need to curb the growth of shadow banking as default risks rise in wealth management products and trust products, while leaving some room for the private sector to access credit, but Moody’s expects asset quality to continue to deteriorate this year in the trust sector.
Trust companies do not face the same government-imposed lending quotas as state banks, giving them more flexibility to hand out loans or pick investment choices.
“The total amount of trust assets classified as prone to default and repayment risks exceeded 643 billion yuan at the end of the first quarter, a record high since data became available in 2014,” said Moody’s.
“The deterioration in trust asset quality will likely continue for the rest of the year as trust borrowers’ financial performance remains under pressure amid slowing economic growth.”
The recent Covid-19 outbreak in Beijing points to a rising risk of a second wave and suggests the economy is still far from a full recovery
Yi Gang, the governor of the People’s Bank of China (PBOC), said last week that the central bank would maintain ample financial system liquidity in the second half of the year as the economy recovers from the impact of the coronavirus, but would need to consider withdrawing that support at some point, reflecting concerns with the growing debt risks.
“Globally as well, the pandemic is far from over and will surely weigh on China’s exports. Thus, it seems it is too early for the PBOC to reverse its easing stance.”
