The extension of a deadline for Chinese financial institutions to comply with new asset-management rules will probably ease pressures facing the shadow-banking sector though the scale of the effect will be limited, said Fitch recently.
The extension granted by the People’s Bank of China allows financial institutions until end-2021 to comply with the new rules, compared with the original deadline of end-2020.
The new rules are aimed to curb riskier shadow-bank lending through irregular channels, promote simplification and standardisation, and reduce leverage and implicit guarantees associated with some asset-management products, Fitch pointed out.
While the extension might reduce immediate pressures facing the shadow-banking sector, it will not offset the impact of investor risk-aversion as many shadow-bank borrowers will continue to face funding difficulties, the credit agency said.
As a result, the extension may have only a limited effect in reducing the potential strains on the real economy stemming from tight funding conditions in the shadow-banking sector, Fitch predicted.
Funding conditions have become more challenging for shadow banking in 2020, as investors are more risk-averse since the outbreak of coronavirus.
A deterioration in asset quality that was evident prior to the outbreak has also continued, although there is as yet little evidence that the pandemic has accelerated the trend significantly, Fitch observed.
Fitch said that the Supreme Court’s plan to cap shadow-bank lending rates will reduce shadow-bank lenders’ willingness to fund weaker credits.
“This could result in some borrowers with weaker creditworthiness that rely on shadow-bank financing facing even tougher credit conditions,” the firm noted.
Financial institutions will still need to resolve non-compliant assets that will not mature by end-2021. “Partly as a result, we do not expect a significant rebound in off-balance-sheet items in total social financing in 2020 and 2021,” Fitch said.
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, the firm added.
“This risk would be amplified if the deterioration in asset quality were to accelerate, for example as a result of China’s economic recovery stalling or reversing because of a renewed outbreak of COVID-19 or setbacks faced by the export sector,” Fitch warned.
According to Fitch, it continues to expect a gradual decline in China’s overall shadow-bank assets in 2020-2021, as regulators focus on curbing irregular financing activities as part of the broader drive to resolve risks in the financial system.
“This will result in a further reduction in securities and trust companies’ channel business. By contrast, we expect bank claims on NBFIs to increase in 2020, although the pick-up will not be substantial. In line with this, bank claims on Non-bank financial institutions increased slightly year-on-year in the first half of 2020,” Fitch noted.
