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Moody's: China's shadow banking sector growing at faster rate; overall leverage is rising

 The document has been translated in other languages

27 Apr 2016

Hong Kong, April 27, 2016 -- Moody's Investors Service says that overall growth of leverage in China (Aa3 negative)—as measured by total social financing (TSF)—has picked up in recent quarters, reflecting strong growth in bank lending and bond financing. Moreover, the broad range of informal credits that comprise shadow banking, the majority of which do not appear in TSF, have also continued to grow strongly.

"TSF may actually understate the true amount of leverage in the system, because it excludes various forms of shadow banking activities that are expanding rapidly," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific.

While the growth of products defined by Moody's as "core" shadow banking— trust loans, entrusted loans, and undiscounted bankers' acceptances—has remained sluggish, other "non-core" activities have been expanding at a faster pace.

"The accelerated growth of shadow banking over the past year has been led by the issuance of wealth management products," adds Taylor. "Mid- and small-sized banks are especially active issuers of such products."

Moody's analysis is contained in its latest Quarterly China Shadow Banking Monitor. The Monitor draws on publicly available data sources to provide an overview of trends and developments in this important component of the Chinese financial system.

"The investor base for wealth management products is becoming more wholesale-oriented, due to an increase in interbank activity," says Stephen Schwartz, a Moody's Senior Vice President.

Schwartz adds that the rising demand for wealth management products (WMPs) by the banks reflects their desire to boost profit margins, as well as efforts to circumvent capital restrictions and regulatory requirements.

Moody's says that the growth in issuance of WMPs and their changing investor base point to rising interconnectedness among the banks, and also between the banks and the shadow banking system. Mid-sized banks are particularly exposed, as evidenced by a further rise in their investment receivables. In addition to intensifying interconnectedness, the rise in investment receivables could strain banks' liquidity and undermine asset quality.

Moody's quarterly monitor notes that the ongoing expansion of shadow banking, driven in part by regulatory arbitrage, underscores the evolving and elusive nature of risks in the financial system.

While efforts to curb shadow banking have succeeded in slowing the growth of "core" components, activity has migrated to less regulated areas. The growing size of the shadow banking system means that during a disorderly contraction, the banks could face difficulty replacing shadow banking credit, leaving borrowers who rely on such financing at risk of a credit crunch.

Subscribers can access the report at https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_189470.

The report may also be found through Moody's topic page titled: China's Trilemma: Growth, Reform and Stability 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 Trilemma include:

• Chinese Diversified Technology Sector: Resilient Amid China's Economic Rebalancing

• Chinese Banks: 2015 Results Show Continued Pressure on Asset Quality and Profitability

• Regional and Local Governments — China: Assessing the Standalone Credit Profiles of Lower-Tier Chinese RLGs

• China Property Focus — March 2016

• Oil and Gas -- China: National Oil Companies' Aa3 Ratings Confirmation Reflects Strong Government Support and Financial Flexibility

• Auto ABS - China: Answers to Frequently Asked Questions About Performance

• Measures to Cool China's Hot Property Markets Are Credit Negative for Developers

• Chinese Overcapacity Sectors: Financial Pressure Tests Implicit Local Government Support

• Property -- China: Developers Face Credit Negative Effects from Measures to Dampen Price Surge in Shanghai and Shenzhen

• Automakers -- China: Sales Growth to Accelerate in 2016 with Vehicle-Tax Cut but Slow in 2017

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 [email protected] 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.

Stephen Schwartz
Senior Vice President
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
SUBSCRIBERS: (852) 3551-3077

Michael Taylor
Managing Director
Chief Credit Officer -- APAC
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's: China's shadow banking sector growing at faster rate; overall leverage is rising
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