A new report from S&P Global Ratings sees Chinese regulators further intensifying their crackdown on the shadow banking sector in 2018.
According to the report this increase in regulatory pressure will put the brakes on both growth in Chinese shadow banking and total credit levels.
“China’s concerted regulatory tightening on multiple fronts could force a decline in shadow banking activity and weigh on the country’s overall credit expansion in 2018,” said S&P analyst Liao Qiang.
While capitalisation levels are likely to decline as the crackdown on shadow banking bring risky assets back onto balance sheets, S&P expects China’s strong economic health to provide support to financial sector reforms.
“A backdrop of continued strong GDP growth should help Chinese banks make regulatory adjustments, and underpin asset quality fundamentals despite a likely deterioration in reported metrics,” said Liao
S&P sees China’s overall non-financial and non-public credit growth easing to 12% this year, from an estimated 15.2% in 2017, with growth in bank slows slowing to 13% from 15%.
The agency expects banks to raise levels of traditional lending to satisfy corporate refinancing demand, while also foreseeing a modest uptick in non-performing loans.
Key areas of credit risk for China include local government financing vehicles and a tepid real estate market.
While Chinese regulators are intent upon curbing leverage levels, Beijing can be expected to launch a rapid policy response in the event of a liquidity shock.