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Announcement:

Moody's: China shadow banking activity increasingly reveals challenging trade-off between growth and deleveraging

 The document has been translated in other languages

03 Dec 2018

Singapore, December 03, 2018 -- Moody's Investors Service says that the contraction of the Chinese shadow banking sector is increasingly revealing the costs of the deleveraging and derisking campaigns in China (A1 stable).

"Reduced shadow credit supply in China has restrained overall credit expansion and stabilized economy-wide leverage," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific.

"But at the same time, privately-owned enterprises, including micro and small enterprises — which demonstrate a high reliance on shadow finance — have experienced the sharpest retrenchment in their access to credit," adds Taylor. "This development suggests that the trade-off between deleveraging and growth is becoming more difficult to ignore."

"The mounting pressure on growth has prompted the authorities to adjust the pace not only of deleveraging but also the crackdown on shadow banking," says George Xu, a Moody's Analyst.

"Looking ahead, we expect the government will adopt a more gradual approach to controlling broad shadow banking activities to limit the disruptions to economic and financial stability. As a result, the shadow banking sector in China will contract at a slower pace in 2019 when compared with 2018," adds Xu.

Moody's points out that the off-balance sheet wealth management products of Chinese banks expanded in the second half of 2018 on what appears to be a more tolerant policy stance towards the shadow banking sector in China.

Moody's conclusions are included in its just released "Quarterly China Shadow Banking Monitor". The publication draws on publicly available data sources to provide an overview of trends and developments in this important component of the Chinese financial system.

Moody's report points out that China's shadow banking sector contracted by RMB3.6 trillion in the three quarters to 30 September 2018 to RMB62.1 trillion, with the broad shadow banking sector in China now totaling 70% of the country's GDP compared with 79% at the end of 2017, and the peak of 87% at the end of 2016.

The contraction in shadow banking activity has primarily been led by core shadow banking activities, including trust loans, entrusted loans and undiscounted bankers' acceptances, which shrank by RMB2.3 trillion in the three quarters to 30 September 2018.

Assets funded by the banks' off-balance sheet wealth management products and the asset management products of non-bank financial institutions declined a further RMB1.6 trillion during the same three quarters.

Formal bank lending and, to a lesser extent, corporate bond finance have partially compensated for reduced credit supply from the shadow banking sector, but these sources of funds remain imperfect substitutes, given the continuing incentives for banks and investors in the bond market to favor state-owned enterprises.

Moreover, an ongoing shift toward shorter maturities across most types of bank loans could indicate the banks' increased aversion to risk, against the backdrop of an uncertain macro environment.

In response to increasing signs that the deleveraging campaign is slowing the economy, China's authorities have eased monetary policy and announced a range of measures to preserve growth and financial stability.

Despite recent easing measures, Moody's believes the government's long-term objectives of deleveraging and containing financial risks remain in place.

Subscribers can access the reports at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152205.

The report may also be found through Moody's topic page "China's trade-off: Deleveraging and stability", available at http://www.moodys.com/chinarebalancing. This page provides a centralized source for Moody's research related to key credit issues in China as the country's macroeconomic story continues to unfold.

Recent Moody's publications relating to China's trade-off include:

• Government of China — A1 Stable: Update following adjustment in geopolitical risk assessment

• Regional & Local Governments — China: Social welfare spending shift is particularly credit positive for developing regions

• Property — China: Rated developers will maintain interest coverage despite rising funding costs

• Structured finance — China: Sector update, Q3 2018 -- Record RMBS issuance underpins market growth

• Non-financial corporates — China: 2019 outlook (Slides)

• Chinese Government-Related Issuers: Credit impact of declining support for rated GRIs (slides)

• Government of China: Deleveraging to slow as growth weakens; government to take on more spending responsibilities in the long run

• Regional & Local Governments — China: Opaque disclosure of 'hidden debt' underscores monitoring challenge

• Banks: China accelerates G-SIBs' total loss-absorbing capacity buildup, a credit positive

• Bond market — China: Policy easing will alleviate issuer refinancing pressure but will not eliminate defaults

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Michael Taylor
MD-CCO APAC
Credit Strategy & Standards
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Jing Xu
Analyst
Credit Strategy & Standards
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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