China’s shadow banking assets will shrink to eight-year low in H2: Moody’s

Tighter regulations will drive a wedge in the connection between banks and NBFIs.

China’s shadow banking assets as a share of nominal GDP are expected to shrink to an eight-year low after registering a sharp fall in the first half of 2021, reported Moody’s Investors Service.

This comes as the deadline to comply with new asset management rules looms.

"Broad shadow banking assets fell by RMB1.34t in H1 to RMB57.8t. This, together with the post-COVID economic rebound, significantly reduced the ratio of shadow banking assets as a share of nominal GDP from 58.3% as of the end of 2020 to 52.9%, an eight-and-a-half-year low," said Lillian Li, a Moody's vice president.

The interconnectedness between nonbank financial institutions (NBFIs) and commercial banks will continue to recede for the second half (H2) of 2021 given a clampdown on opportunities for regulatory arbitrage, such as through wealth management products and structured deposits, according to Moody’s.

Commercial banks' net claims on NBFIs fell by RMB1t in the second quarter to RMB1.4t, the fourth consecutive quarter of decline and the lowest level since the third quarter in 2015.

Since late 2020, new bond issuance continues to fall due to bond defaults and credit stress. As a result, Moody's expects offshore investors to remain cautious and onshore bond issuance to remain subdued. “[This] reflects tighter oversight to contain leverage in the property sector and local governments' contingent liabilities,” the ratings agency wrote.

Growth in medium to long-term household loans will also reportedly remain moderate in H2 as banks limit their exposure to property loans. 

However, growth in the medium to long-term corporate loans is expected to remain strong in the second half of the year, with monetary policies sighted to become more accommodative as China looks to support economic recovery.