China's shadow banking assets will shrink further after falling sharply in the first half (H1) of 2021, as the deadline to comply with China's new asset management rules approaches by the end of this year, said Moody’s recently.
"Broad shadow banking assets fell by RMB1.34 trillion in H1 2021 to RMB57.8 trillion. 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," noted Lillian Li, a Moody's Vice President.
Authorities in China will likely allow faster credit growth in H2 2021 to offset slowing economic growth, Moody’s pointed out.
However, the gap between the growth in credit and nominal GDP will likely continue to narrow, the credit rating agency added.
As a result, economy-wide leverage will stabilise through 2021, after falling in H1 2021 as GDP expansion had outpaced credit growth, the firm predicted.
New bond issuance continues to fall due to bond defaults and credit stress since late 2020, according to Moody’s, expecting that offshore investors to remain cautious and onshore bond issuance to remain subdued—which reflects tighter oversight to contain leverage in the property sector and local governments' contingent liabilities.
Growth in medium to long-term household loans will remain moderate in H2 2021 as banks limit their exposure to property loans, Moody’s said.
But growth in medium to long-term corporate loans will remain strong in H2 2021 as monetary policies become more accommodative and targeted to support economic recovery, the firm predicted.
The interconnectedness between nonbank financial institutions (NBFIs) and commercial banks will continue to recede for H2 2021 given a clampdown on opportunities for regulatory arbitrage such as through wealth management products and structured deposits, the firm noted.
Commercial banks' net claims on NBFIs fell by RMB1.0 trillion in the second quarter to RMB1.4 trillion, according to Moody’s, adding that this was the fourth consecutive quarter of decline and the lowest level since the third quarter in 2015.