China shadow banking credit down $42b amidst pandemic disruption

A 5% dip in core shadow credit triggered the fall.

China’s core shadow banking sector, including trust, entrusted loans and undiscounted bankers, saw a downward trend amidst business disruptions caused by the COVID-19 outbreak, according to a Moody’s report.

Core shadow credit fell $42b (RMB300b) in the first two months of 2020 from $3.1t (RMB22.2t) at end-2019, compared with a nearly flat outstanding amount for the same period last year. The 5% dip in core shadow credit triggered the fall, owing to the disruptions caused by the virus.

Bank lending to the non-financial private sector also extended its downward trend as short-term household loans also declined due to a plunge in consumption.

Broadly defined shadow banking assets fell by $324b (RMB2.3t) in 2019 to end the year at $8.3t (RMB59t), the lowest in three and a half years, Moody’s noted. In particular, core shadow banking activities including trust loans, entrusted loans and undiscounted bankers’ acceptances reported a combined decline of $253b (RMB1.8t) in the year. The ratio of these assets as a share of nominal GDP fell to 60% at end-2019 compared with 67% at end-2018 and its peak of 86% at the end of 2016.

“Overall credit growth as captured by our adjusted total social financing (TSF) series was unchanged at 9.0% in the fourth quarter of 2019. This outpaced nominal GDP growth in the same period and led to a slight rise in economy-wide leverage. This rise would continue into the new year as the central bank’s easing measures amid the outbreak will likely increase leverage further while economic growth will be markedly lower in coming quarters,” said analysts Michael Taylor, Lillian Li and Zedric Cheung.

Yields on cash management type wealth management products (WMPs) will likely fall towards those on money market funds (MMFs) as a result of a new policy which requires that such WMPs set their investment scope close to that for MMFs, the report said. Returns on structured deposits are also under pressure due to strengthening supervision, and their growth of issuance has declined continuously over the past 18 months.

Issuing rates of interbank negotiable certificates of deposit (NCD) by small and midsized banks declined in the first two months of 2020 as the People’s Bank of China eased monetary policies. As a result, NCD issuance by joint-stock banks, city commercial banks and rural commercial banks picked up in this period. This reversed the decline in such issuance in the second half of 2019 due to regional bank distress in the middle of the year, the report concluded.

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