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Announcement:

Moody's: China shadow banking growth will be constrained in 2018 by intensified regulation

 The document has been translated in other languages

12 Feb 2018

Hong Kong, February 12, 2018 -- Moody's Investors Service says that intensified regulation in China (A1 stable) is demonstrating a growing impact across the shadow banking sector. In particular, the aggregate growth of entrusted loans, trust loans and undiscounted bankers' acceptances has slowed, due to tightened oversight. This situation will further constrain broad shadow banking growth in 2018 and reduce its contribution to total social financing flows.

"What started as a regulatory crackdown on some previously fast-growing shadow banking segments — such as the banks' wealth management products and non-bank financial institutions' asset management plans — has spread to other major core shadow banking components," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific.

"The effect of intensified regulation is no longer limited to de-risking the financial sector, but is now beginning to impact the supply of credit to the real economy," adds Taylor.

Moody's analysis is contained in its latest "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 calculates that during 2017, shadow banking assets increased at one tenth of the amount of the previous year, expanding RMB1.1 trillion versus RMB11.2 trillion in 2016.

"Shadow banking activity also declined as a percentage of GDP for the first time since 2012, falling to 79.3% at the end of 2017, compared to the peak of 86.7% at the end of 2016," says George Xu, a Moody's Analyst and the report's main author.

"The drivers of the slowdown were declines in the banks' wealth management products, and non-bank financial institutions' asset management plans," adds Xu. "These two shadow bank activities have been the focus of the authorities' coordinated regulatory actions since the second half of 2016."

Moody's explains that enhanced regulation initially focused on the increasing interconnectedness between banks and shadow banks, targeting in particular, the buildup of leverage in the financial sector. However, more recent measures target core shadow banking activities, which have been an increasing source of credit supply to the real economy in 2017.

"These measures will likely reduce the supply of credit to more marginal borrowers, who are most dependent on shadow finance," adds Xu. "Consequently, refinancing risks are increasing for some sectors, such as property developers, local government financial vehicles, and companies from overcapacity and polluting industries."

Moody's says that liquidity conditions will continue to tighten for Chinese financial institutions, and are particularly great for smaller banks and non-bank financial institutions. Tighter liquidity is indicated by a variety of market measures, including the rates on negotiable certificates of deposit and the banks' wealth management products.

To offset the impact of tighter liquidity, the People's Bank of China has continued to expand direct lending to the banks, with an increasing use of medium-term liquidity facilities. However, non-bank financial intermediaries may also be facing liquidity pressures, as indicated by a year-end spike in the repo rate that applies to these institutions, and their greater reliance on wholesale funding in the interbank market.

Moody's also says that tighter domestic liquidity conditions may be pushing some borrowers offshore.

Specifically, there are indications that the domestic bond market is adversely affected by tighter financing conditions, with a growing number of domestic bond issues either cancelled or delayed. Combined with the regulatory crackdown on shadow banking, some borrowers that had previously relied on shadow finance — such as smaller property developers and local government financing vehicles — may now be turning to the offshore market to meet their funding needs.

The report may also be found through Moody's topic page "China's trade-off: Deleveraging and stability", available at https://www.moodys.com/newsandevents/topics/china-s-trade-off-deleveraging-and-stability/-/00702A/00702A/-/-1/0/-/0/-/-/-/-/-/-/-/en/global/pdf/-/rra. 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:

• Regional & Local Governments — China: Recent data restatements cast doubt on RLGs' ability to support state-owned enterprises

• Cross-Sector — China: CBRC's ongoing focus to address systemic risks is positive for banks and corporations

• Cross-Sector — China: Debt-equity swaps provide liquidity relief, but some liabilities remain in system

• Refining — China: Government's increased sector supervision is credit positive for CNPC and Sinopec

• Consumer loan ABS — China : New regulations for internet-based lending are credit positive

• Banks: China's tighter regulation on banks' entrusted loans is credit positive

• Banks: China implements Basel Committee framework for controlling large exposures, curtailing bank risk

• State-owned enterprises (SOEs) — China: Leverage will continue to decline gradually for most rated SOEs through 2018

• Asset Management: China's new capital requirements on distressed asset management companies are credit positive

Subscribers can access the report at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1112146

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.

Jing Xu
Analyst
Credit Strategy and Standards
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Michael Taylor
MD-CCO APAC
Credit Strategy and Standards
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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