Shadow credit in China is expected to remain subdued, said Moody’s recently.
According to the firm, shadow banking as a share of nominal GDP fell to 39.2% in Q2 2023 from 41.6% at the end of 2022.
China's credit growth was a mixed picture in August, although there were early signs of recovery, suggesting that monetary and fiscal stimuli were gaining traction, the credit rating agency said.
Increased policy support may provide some room for expansion of shadow credit in China, but the banking sector will likely do the heavy lifting in boosting credit demand in the coming months, the firm added
Credit growth will be watched by the market as a sign of the effectiveness of the People's Bank of China's efforts to encourage lending, with the formal banking sector continuing to drive new credit supply, said Lillian Li, a Moody's Vice President and Senior Credit Officer.
"Increased funding support to the property sector could lead to some growth in shadow credit in China in the short term, but shadow banking's role as a credit provider to the real economy will continue to shrink,” Li noted. “It fell to 39.2% as a share of nominal GDP in the second quarter of 2023 from 41.6% at the end of 2022.”
The trust sector could face liquidity risks during the property downturn, impacting the underlying asset quality and liquidity of trust plans, Moody’s said.
The current level of missed payments could further dampen investors' poor appetite for trust products and trigger early redemptions, potentially setting the tone for a negative feedback loop, with property stress causing strains in the financial system and exacerbating the spillover to a wider range of sectors, the firm predicted.
Regulatory controls will be key mitigants against spillover risks to financial institutions from nonbank financial institutions (NBFIs), according to Moody’s.
Smaller banks are more exposed to potential spillover risks as they are net lenders to NBFIs, while large banks remain risk-averse on NBFI lending, the firm said.
But wider contagion risks will be limited amid China's shift toward a more bank-based system and regulatory controls to curb excess risk taking in banks' NBFI-related investments, the firm added.