China's shadow banking credit growth to slow in H2: Moody's

The upcoming lower interest rates on informal lending will kick on growth prospects.

Shadow banking credit growth in China is expected to slow over the next few months whilst formal bank lending is forecasted to rise, according to Moody’s Investors Service.

Chinese shadow banking assets rose by $95.4b (RMB650b) in H1 to total $8.35t (RMB59.6t), led by a rise in wealth management products from asset managers and growing undiscounted bankers’ acceptances.

But this growth will come under pressure once the Chinese Supreme Court’s lower interest rates on informal lending kick in, says Michael Taylor, a Moody’s managing director and chief credit officer.

In contrast, formal bank lending will continue to dominate new credit supply as banks maintain a strong flow of long-term credit to corporates.

In the first eight months of 2020, new bank loans reached approximately $2.2t (RMB15.1t), a 25% increase from the same period a year ago. Meanwhile, net flows from direct financing nearly doubled to about $645.9b (RMB4.4t), driven mainly by corporate bond issuance.

A decline in trust loans have also accelerated amidst tighter regulator scrutiny.

“There has been a significant reduction in net trust flows to the property sector mainly due to stricter regulatory scrutiny and the crackdown on pass-through channel business. In addition, trust companies may have become more risk averse amid defaults by several companies in this highly leveraged sector,” notes Moody’s analysts Taylor, Lillian Li, and Zedric Cheung in the report.

Funding markets are also becoming more competitive on the back of declining returns on deposits and money market funds (MMFs), and with money market conditions having eased. The returns offered by the largest Chinese MMF even fell below the one-year deposit rate for the first time ever at the end of the second quarter. MMFs’ assets under management also partially reversed the significant increase in the first quarter.

This decline also reflects the increased attractiveness of alternative investments such as stocks and alternative investment vehicles including banks’ wealth management products (WMPs), the report adds.