Thursday, 29 July 2021

China’s shadow banking sector dims as formal bank lending dominates new credit supply

Moody's Investors Service says in a new report that despite some growth in the first half of 2020, shadow banking credit in China will likely slow in the months ahead while formal bank lending rises.

Shadow banking assets rose by around RMB650 billion in the first half of 2020 to finish at RMB59.6 trillion, led by a rise in wealth management products from asset managers and growing undiscounted bankers' acceptances.

"While the one-year delay in the implementation of reforms for the asset management sector could result in further growth of shadow banking credit in the short term, shadow banking will come under pressure over the medium term once the Chinese Supreme Court's lower interest rates on informal lending — including for microcredit, pawnshop loans and online peer-to-peer lending — kick in," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer.

In contrast, formal bank lending will continue to dominate new credit supply as banks maintain a strong flow of long-term credit to corporates, reflecting the government's policy of providing support to businesses and investment. In the first eight months of 2020, new bank loans reached RMB15.1 trillion, a 25% increase from the same period a year ago. Meanwhile, net flows from direct financing nearly doubled to RMB4.4 trillion, driven mainly by corporate bond issuance.

Meanwhile, the decline in trust loans accelerated, with the net flows of trust lending falling by RMB256 billion between May and July 2020. In particular, net trust flows to the property sector shrank by RMB203 billion in the first half of 2020 amid stricter regulatory scrutiny and a crackdown on pass-through channel business. There are also signs this highly leveraged sector is growing more risk-averse, given the sharper decline in trust lending in June following defaults by several trust companies.

Re-disseminated by The Asian Banker