From Moody's latest "Quarterly China Shadow Banking Monitor":
Moody's: China's shadow banking sector impacted by increasingly tight systemic liquidity
Liquidity in China's financial system is increasingly tightening
- Stricter regulatory measures seek to constrain the growth of leverage
- Tighter systemic liquidity could crystalize the risks inherent in the more complex and opaque funding structures used by smaller banks
These banks are vulnerable to the withdrawal of wholesale funding
- used to finance their investments in the trust and asset management schemes of non-bank financial intermediaries to boost profitability, as well as to circumvent capital restrictions on lending
Chinese authorities recognize the risks in the shadow banking sector
- Seeking to address them through a new set of regulatory guidelines, highlighting that preventing financial risks has become one of the government's top priorities this year
- However indications that regulatory measures to curb systemwide leverage show unintended consequences; specifically, in reviving 'core' shadow banking activities that had previously been constrained by regulation"
Borrowers in sectors such as property, local government financing vehicles and overcapacity industries with high financing needs face reduced access to traditional bank loans and the primary bond market
- As a result, there are increasing signs that these borrowers are turning to shadow banks as an alternative funding source, which drives in particular, demand for trust loans and entrusted loans.
