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Only Regulatory Action Curbed Explosive Growth In Chinese Shadow

By Mani
Updated on

Thanks (and only thanks) to unified initiatives from PBoC, CBRC and CSRC, under Central government’s guidance,  the runaway growth in China’s Shadow Banking “industry” has witnessed a trend reversal, notes Moody’s. David Yin and colleagues said in their July 3 research piece on Chinese banks that they believe these regulatory actions are credit positive for Chinese banks.

China’s Shadow Banking, Drop in wealth management product issuance from financial instutions

Yin and team traced the major regulatory initiatives from Chinese regulators aimed at curbing systemic financial risks since the second half of 2016. They now underscore that these initiatives from the People’s Bank of China (PBoC), the China Banking Regulatory Commission (CBRC), and the China Securities Regulatory Commission (CSRC) have indeed curbed key drivers in China’s shadow banking sector.

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The Moody’s analysts highlight that the reversal in China’s shadow banking growth can be evidenced from the slowdown in M2 growth and the slight drop in outstanding wealth management products (WMPs) issued by Chinese banks.

Citing an HSBC report, ValueWalk highlighted in May that during the first quarter, the PBoC included for the first time off-balance-sheet wealth management products in its measurement of broad credit growth. A draft rule also prohibited a guaranteed return on asset management products, which has been largely followed by several wealth management products in China.

The Moody’s analysts note that in recent years, Chinese banks have been extending financing to corporates by using asset management schemes established by non-bank financial institutions as pass-through channels and by booking this financing as investments in loans and receivables. However, the analysts believe the CBRC’s more stringent implementation of “see-through” requirements will discourage the use of pass-through channels and enhance the transparency of banks’ assets:

China's Shadow Banking

The Moody’s analysts add that these initiatives have started yielding results, as within the banking system, the balance of WMPs issued by Chinese banks dropped to RMB28.4 trillion at the end of May from RMB29.1 trillion at the end of 2016.

Moody’s: Chinese authorities’ recent initiatives will be credit positive for banks

Yin and colleagues said the introduction of the Macro Prudential Measurement (MPA) scheme has trimmed banks’ incentives to hide credit in investments and off-balance sheet WMPs. The MPA scheme links a bank’s capital adequacy ratio with its broad credit assets, which encompass loans, investments, interbank assets and off-balance sheet WMPs.

Though the recent combined initiatives from Chinese authorities are still in an early stage, the Moody’s analysts believe these measures will be an “overall credit positive” for Chinese banks. The analysts expect additional measures, such as tightened liquidity and higher interbank interest rates, will discourage the practice adopted by some banks to fund their long-term investments through short-term market funds.

Striking a cautionary tone, the Moody’s analysts cite some “adjustment risks,” as banks that depend on short-term market funds are facing reduced profits, in addition to being exposed to refinancing risks. Hence, the analysts suggest that Chinese authorities initiate a measured approach with their policies, keeping an eye on the risk of a systemic liquidity crunch.

Additionally, if or when the regulators get out will China's shadow bank growth get out of control? Only time will tell for sure, but it certainly sounds like that from the report.


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