Relief extension for Chinese shadow banks beneficial but limited: Fitch

It will not offset the impact of investor risk aversion.

The extension for Chinese financial firms to adhere to new asset management rules will likely take some heat off the shadow banking sector, said a Fitch Ratings report, but the scale of the impact might be limited.

The new rules seek to curb riskier shadow lending through irregular channels, promote simplification and standardisation, and lower leverage and implicit guarantees associated with some asset management products, with the extension granted by the People’s Bank of China allowing financial institutions until end-2021 to comply.

Fitch has already expected regulators to shift towards a more qualitative approach to curbing shadow lending lest they cause a potential liquidity crisis amidst a shaky economy. However, the move might not also represent a notable deviation from the authorities’ commitment to addressing risk in the financial sector in the long term.

“The extension may reduce immediate pressures facing the shadow-banking sector, although it will not offset the impact of investor risk-aversion, so many shadow-bank borrowers will continue to face funding difficulties,” Fitch said.

Moreover, the headroom may only have a little impact on limiting the possible economic pitfalls from the shadow sector’s constrained funding conditions.

“Delaying the implementation of the asset-management rules is likely to slow the process of reducing non-compliant assets, holding back - for now - official efforts to curb the risk of contagion spreading from institutions in the shadow-banking system to the banking sector,” Fitch concluded.