China's shadow banking assets will continue to decline on regulators' continued focus on containing systemic risks in the financial sector, said Moody’s recently.
Broad shadow banking assets fell by around RMB1.58 trillion in the first three quarters of 2021 to RMB57.6 trillion, pointed out Lillian Li, a Moody's Vice President and Senior Credit Officer.
This significantly reduced the ratio of China's shadow banking assets as a share of nominal GDP to 51.5% from 58.3% at the end of 2020, the lowest level since 2013, she added.
Trust lending and asset management led the decline in shadow banking assets, according to the credit rating agency.
Trust loans fell by RMB1.2 trillion in the first three quarters of 2021, while assets funded by wealth management products and asset management products declined by RMB890 billion, the firm said.
Authorities' strict monitoring of local governments' leverage and contingent liabilities has also quickened the trust outflow from the infrastructure sector, the firm added.
Trusts will continue to shift away from real estate and infrastructure in 2022 as authorities strictly monitor this financing channel to curb speculative housing purchases and limit developers' leverage, Moody’s noted.
Economy-wide leverage will stabilise in 2022 as Chinese authorities will likely tolerate slower economic growth and maintain tight controls over the property sector and shadow credits, Moody’s said, adding that the overall credit growth, as captured by Moody's adjusted total social financing (TSF) series, moderated to 8.1% in the third quarter of 2021.
The gap between credit growth and economic growth continued to narrow as nominal GDP growth also slowed, the firm predicted.
Commercial banks have become more risk-averse toward funding nonbank financial institutions (NBFIs), Moody’s pointed out.
Their net claims turned negative in Q3 2021 for the first time in six years as the overall credit environment tightened amid the property downturn, according to the company.
This trend will continue in 2022 as the authorities remain focused on preventing spillover risks in the financial system and banks, Moody’s predicted, adding that commercial banks' de-risking measures will continue to limit their funding to NBFIs and reduce the interconnectedness with them.