China’s deleveraging campaign appears to have borne fruit, with growth in shadow banking activity halting in the first half and nominal GDP expanding faster than shadow banking assets for the first time since 2012.
A new report from Moody’s Investors Service says that the first half of 2017 saw growth in broad shadow banking activity cease in China, on the back of a decline in the issuance of higher risk instruments such as wealth management products by banks and asset management plans by non-bank financial institutions.
As a result nominal GDP growth beat growth in shadow banking assets in the first half of 2017, with the latter’s share of GDP falling to 82.6% of GDP as of 30 June 2017 from a peak of 86.5% in 2016.
According to Moody’s the share of wealth management products held by interbank investors has started to decline, as have the claims of banks on non-bank financial institutions.
This is a sign that the heavy-handed regulatory crackdown launched by the central government earlier this year has proved effective at reducing the interconnectedness of the financial sector, as well as reduced the systemic instability created by lengthy and opaque funding chains.
Moody’s nonetheless points out that core forms of shadow banking, including entrusted loans, trust loans and undiscounted bankers’ acceptances, have continued to grow, expanding for the first time in three years during the third quarter.
Moody’s sees further curbs on shadow banking in the wake of the 19th National Chinese Communist Party Congress.
“Following the 19th CCP Congress, financial-sector regulation will likely continue to restraint the growth of shadow banking activities and address some key imbalances in the financial system,” said Moody’s analyst George Xu.
“However, the challenges associated with regulatory tightening and the broad leveraging campaign remain.”
The challenge of Chinese regulators will be to prevent the deleveraging and de-risking of the financial sector from triggering systemic upset.
In order to forestall any liquidity constraints, the Chinese central bank is easing the availability of funds via open market operations, giving banks breathing space to shrink their investment portfolios.
Aggregate leverage continues to grow, albeit at a slower pace in the third quarter, with bank lending still robust, especially to households and corporate bond issuance on the rise.
Small and medium-sized banks appear to be reducing their dependence upon interbank borrowing, instead availing themselves of funds from the central bank.
The new issuance of interbank CD’s nonetheless hit a record high in September, indicating that some smaller-sized lenders are facing rollover challenges.