China’s monetary policy has become more accommodative, and the authorities have slowed down in shrinking the size of shadow banking assets to avoid credit crunch affecting the economy
Rating agency Moody’s issued a report saying that in the third quarter of this year, although the size of China’s shadow banking assets continued to shrink, the contraction scale slowed sharply from 1.7 trillion yuan (RMB; the same below) in the first half of the year to only 400 billion yuan . Moody’s believes that because monetary policy is currently focused on supporting economic growth, China’s leverage is expected to rise further.
The report pointed out that as of the third quarter of this year, the size of China’s shadow banking assets had dropped to 59.2 trillion yuan, equivalent to 62% of the nominal gross domestic product (GDP) ratio at the end of September, which was lower than 68% at the end of last year. At the end of 2016, the proportion of shadow banking assets equivalent to nominal GDP had reached a peak of 87%.
Reduced to 62% of GDP
Moody’s managing director and chief credit officer for Asia Pacific Michael Taylor said that credit growth in the third quarter exceeded nominal GDP growth, resulting in a slight increase in the overall leverage of the economic system. As monetary policy focuses on supporting economic growth, it is expected that leverage will rise further.
However, the Chinese authorities have shown no signs of easing the regulation of the property market. Moody’s assistant analyst Zhang Yiran said that the net increase in trust loans in the real estate industry decreased in the third quarter, which is believed to be mainly due to the stricter supervision of real estate developers by the authorities and the strengthening of the channel business.
At the same time, trust loans from local government financing platforms remained stable in the third quarter following a rebound at the beginning of the year. Zhang Yiran indicated that this reflects the government’s continued support for infrastructure projects led by platform companies.
Lin Junhong, head of the research department of the Shanghai Commercial Bank’s treasury business department, said that since the outbreak of the Sino-US trade war, China has become more accommodating in terms of credit. In particular, it is difficult for SMEs to obtain loans from traditional banks. To support the economy, the authorities will adopt a relatively loose attitude towards shrinking shadow banking assets.
Loans flow mainly to SMEs
However, he estimates that the PBOC will not unduly relax the size of shadow banking assets and will strike a balance between preventing risks and supporting the economy. At the same time, it also depends on the direction of Sino-US trade negotiations. If the prospects of the two sides are optimistic and China’s economic pressure is reduced, the People’s Bank of China may have measures to tighten the size of shadow banking assets.
Liao Qun, chief economist of CNCB International, believes that the slowdown in the size of shadow banking assets is an inevitable result of accommodative policies. He also mentioned that although China ’s leverage will rise, it is believed that the risks are still manageable, because shadow bank loans are currently mainly invested in SMEs, and funds flow into the real economy rather than speculative speculation in the market. In addition, the People’s Bank of China adheres to the principle of “flood flooding” and expects the leverage ratio to increase only slightly.