Chinese Shadow Banking Sector Surged 21% in 2016: Moody’s


A new study from Moody’s points to surging growth in China’s shadow banking sector, which skyrocketed by more than a fifth in 2016.

Ratings agency Moody’s estimates that China’s shadow banking assets ballooned to 64.5 trillion yuan (USD$9.34 trillion) in 2016, for year-on-year growth of 21%.

While shadow banking skyrocket across 2016, the latest Moody’s report notes that growth eased considerably in some segments during the second half due to heightened regulatory scrutiny.

Moody’s definition of shadow banking focuses upon the three credit intermediation products of entrusted loans, trust loans and undiscounted bank bills of acceptance, as well as bank wealth management products, the wealth management products supplied by securities firms, finance company loans and irregular loans.

Bank WMP’s continue to see the most rapid growth amongst shadow banking sectors, surging to 29.1 trillion yuan in the first quarter of this year.

Is regulatory crackdown spurring growth of shadow banking?

Despite the tightening of regulatory constraints by authorities, Moody’s sees a reinvigoration in the shadow banking sector, whose growth rates have already hit a two year high.

According to Moody’s analyst Xu Jing the central government has emphasised the key importance of financial risk prevention this year, and China’s financial regulators have set their sights on risk in the shadow banking sector in particular with the issuance of a new slew of regulatory directives.

These efforts to control leverage in the financial system have had the unexpected consequence, however, of reinvigorating core shadow banking activities despite the prior establishment of regulatory controls.

The report notes that despite the launch of regulatory controls on core forms of shadow banking in 2014, the pace of expansion further increased during the first quarter despite negative growth in undiscounted bank bills of acceptance, due to strong gains amongst trust loans and entrusted loans.

Over the past few month total social financing – China’s broad measure of credit in the economy, has outpaced expectations despite growth in bank loans falling short of forecasts.

The core reason for this is that conventional financing channels such as the traditional bank loans and securities issuance are still difficult to access for borrowers in those sectors that have a high demand for capital, such as real estate developers, local government finance platforms and industries suffering from overcapacity.

Moody’s notes that the yields for corporate bonds of various maturities have expanded since the start of the year, possibly due to heightened concern amongst investors of default risks and stricter regulatory scrutiny.

Difficulty accessing finance via conventional means is compelling those borrowers with a high demand for capital to turn to shadow banking for funds, in particular entrusted loans and trust loans.

Data from Moody’s indicates that lending by trust companies to the real estate sector posted net growth of 124 billion yuan in the second half of 2014.

Deceleration in wealth management product growth

While trust loans and entrusted loans could be revigourated by heavier pressure from regulators, Moody’s notes that the most important source of Chinese shadow banking at present – wealth management products, is seeing a marked slowdown in growth.


The report points out that while WMP’s remain the fasted expanding segment of the shadow banking sector, the instruments have seen slowing growth ever since the second half of 2016.

In Q1 the growth rate fell to 18.6% as compared to 41.9% in June 2016, with the total balance of WMP’s reaching 29.1 trillion yuan.

A key factor in the slowdown of WMP growth is likely the inclusion since Q1 of these off-balance instruments in the macro-prudential assessments conducted by PBOC.

Moody’s nonetheless notes that WMP growth amongst small and medium-sized banks outpaced that of the big state-owned banks last year, exacerbating latent risk amongst these more vulnerable lenders.

Regulatory crackdown creates liquidity risks

Liquidity continues to tighten in the Chinese financial system as regulatory bodies expand efforts to deleverage the economy.

Towards the end of March the interbank secured repurchase rate lifted to 5% and the gap between WMP yields and the one year deposit base rate, as the People’s Bank of China held monetary policy steady and lenders responded to end of quarter macro-prudential assessments.

Moody’s notes that efforts to adjust the structure of the financial sector are exacerbating liquidity risk, particularly for smaller banks with complex and opaque asset structures, whose market share is nonetheless increasing.

Big banks fall back as smaller lenders and non-bank financial institutions flourish

The report points out that since the turn of the decade the share of the big state-owned banks in the financial system has dropped significantly,as asset growth amongst smaller banks and non-bank financial institutions outpaces the large-scale incumbents.

Moody estimates that over the past six years the big banks have seen their share of financial sector assets fall from 52% to 28%, while for small and medium-sized banks it has risen from 21% to 25%, while non-bank financial institutions have seen a sharp increase to 20% from 9% previously.

This could is creating a series of potential risk sources, including nested credit assets, increased interbank lending activity and greater ties with shadow banking sector amongst smaller lenders and non-bank financial institutions.

Nested credit assets amongst non-bank financial institutions

Moody’s points out that gains in sector asset share amongst non-bank financial institutions such as trusts, securities firms, investment funds and their subsidiaries could be making the Chinese financial system more susceptible to shock due to the comparatively low stability of their asset structures.

The “nested” nature of their credit assets also makes them more opaque.

Smaller lenders see surge in interbank lending and investment

China’s small and medium sized banks are also a source of liquidity risk due to their greater reliance upon interbank lending and interbank deposits.

Looking at the interbank sector as a whole, large-scale banks are net providers of capital while smaller lenders, securities companies and other financial institutions are net borrowers.

Small and medium-sized banks have seen their reliance on interbank wholesale financing increase, which in turn raises the interconnectedness and contagion risk of the financial sector as a whole.

Moody’s notes that various forms of wholesale financing hit a peak the start of the year, accounting for 36.1% of all credit sources, while interbank lending tapped a historic high of 5 trillion yuan.

Interbank deposits are an especial source of concern since they raise the interconnectedness and reciprocal exposure of the financial sector, which could in turn magnify the impacts of any adverse events.

Since 2014 smaller lenders have also shifted their interbank activities from the assets purchased under resale column to investment receivables, which Moody’s argues further increases linkages between formal banking and the shadow banking system.

Investment receivables are a potential source of credit risk, given that they are subject to limited disclosures when it comes to composition or quality, making it more difficult for regulators to conduct risk assessments or adopt effective risk mitigation measures.

The Moody’s report also notes that small and medium-sized banks are involved in the shadow banking sector to a greater extent than the big incumbents, as they are more inclined to issue interbank deposits and wealth management products to raise wholesale funds for investment in various asset management plans that can raise their profitability as well as dodge regulatory constraints.

Insurance sector emerges as major shadow banking source

Moody’s also points out that the insurance sector has also emerged as a major source of shadow banking following the loosening of investment product restrictions in 2012, some insurers pouring assets into “other investments” and beneficiary investments, which encompass a sizeable volume of shadow banking products.

The low liquidity of these products of these products may be constricting the liquidity of insurers, as well as raising their credit risk levels.