China's shadow banking activities growing at rapid pace

Even amidst tighter regulations.

Moody's Investors Service says that while tighter regulations in China have been effective in slowing the growth of core shadow banking activity, other shadow banking activities have been expanding more rapidly.

According to a release from Moody's Investors Service, the growth of core shadow banking activities has fallen below the rate of nominal GDP growth in the past quarter.

"As tighter regulations have encouraged credit flows to move toward the formal banking system," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific. Moody's defines core shadow banking activities as entrusted loans, trust loans, and undiscounted bankers' acceptances.

Here's more from Moody's Investors Service:

Taylor adds, however, that non-core components of shadow banking such as umbrella trusts, e-financing, and peer-to-peer lending have been growing at a faster pace. As such, shifts are taking place in the risk and
composition of the broader range of shadow banking activities. Moody's also highlights that the share of trust sector assets in the capital market has risen at the expense of loans to more traditional sectors.

Moody's analysis is contained in its Quarterly China Shadow Banking Monitor. The Monitor draws on publicly available data sources to provide an overview of trends and developments in this important component of the
Chinese financial system.

"The contraction in core shadow banking activity and shift in credit flows back towards the formal banking system improves transparency and lowers financial risks, but could also put pressure on sectors that rely on shadow banking, such as small and unrated property developers and other micro and small enterprises," says Stephen Schwartz, a Moody's Senior Vice President.

Still, Schwartz notes that overall credit flows, as measured by total social financing, have held up with support from monetary policy easing.

Recent stock market volatility has thrust the role of margin finance into the spotlight. Moody's notes that there are multiple channels of margin finance. The component for which data is available, namely lending by brokerage firms, has declined sharply with the market selloff. According to Moody's this has prompted the authorities to loosen restrictions, in a break with the recent trend of tighter regulations.