Friday, 14 June 2024

China's shadow banking sector shrinks sharply amid continued regulatory oversight

5 min read

China's shadow banking assets contracted sharply in 2021 amid regulators' continued focus on containing financial systemic risk,  although the rate of decline will likely slow in 2022 as fewer new regulatory measures are rolled out given the effectiveness of those already taken, according to Moody's Investors Service.

Lillian Li, vice president of Moody's said, "Chinese authorities' intensified regulation of the shadow banking sector, which began in 2017, has substantially reduced the sector's size as a share of nominal gross domestic product (GDP) and of banking sector assets. Banks' and shadow banks' interconnectedness has also sharply declined, and while pockets of risk remain, we expect no major new regulatory initiatives in 2022".

Broad shadow banking assets declined by RMB 2.19 trillion ($344.87 billion) in 2021 to RMB 57.0 trillion ($8.976 trillion), while shadow banking assets fell to 49.8% of nominal GDP, compared with 58.3% at the end of 2020 – the lowest level since 2013.

Systemic risk spillovers to the financial sector from the shadow banking sector have also been reduced. Commercial banks' net claims on nonbank financial institutions (NBFIs) continued to decline in fourth quarter of 2021, mainly driven by the negative read for net claims by large banks. That said, potential risks remain in smaller banks as their interconnectedness with NBFIs remains high.

Economywide leverage will rise slightly in 2022 amid slower credit and economic growth. Overall credit, as captured by Moody's adjusted total social financing (TSF) series, grew 8.3% in the fourth quarter of 2021. Credit growth will likely slightly outpace nominal GDP growth for the whole of 2022, in particular during the first half of the year as the government targets greater credit availability amid mounting uncertainty and demand for more infrastructure spending.

Re-disseminated by The Asian Banker from Moody's

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