24 October 2016
Borrowing costs are expected to fall further in China as the central bank injects more money into the system. Photo: Bloomberg
Borrowing costs are expected to fall further in China as the central bank injects more money into the system. Photo: Bloomberg

Shadow banking activities in China slowing down: Moody’s

Shadow banking activities in China are slowing down as the central bank’s monetary policy easing is fueling a shift in credit activity back to the formal banking system, according to Moody’s Investors Service.

China’s shadow banking assets are estimated to have reached 41 trillion yuan by the end of 2014, representing 65 percent of the nation’s gross domestic product (GDP), compared to 58 percent in the previous year.

But a slowdown is clearly evident, as seen in the shrinking share of shadow banking in overall credit flows, Moody’s said in a statement released Wednesday.

Michael Taylor, Moody’s Chief Credit Officer for Asia-Pacific, noted that although the shift in credit flows back to the regulated banking system should enhance transparency and reduce financial risks, it could pose challenges to smaller businesses.

“It could… create pressure on some borrowers, such as small and medium-size enterprises and small property developers who are reliant on the shadow banking sector,” he said.

China’s high borrowing cost is expected to fall materially this year as the central bank is set to inject more cheap money into the system through pledged supplementary lending (PSL) and other liquidity facilities, BNP Paribas said earlier.

Weighted-average loan rates were 6.92 percent as of end 2014, down only 22 basis points from a year ago after robust interest-rate cuts in November last year.

But efforts are being taken by Chinese authorities to bring down funding costs, BNP said.

The People’s Bank of China (PBoC) has cut the benchmark rates twice in three months since November 2014 and the seven-day reverse repo rates have been brought down to 3.35 percent from 3.85 percent at the beginning of the year.

We expect one more rate cut this year and repo rates are likely to be lowered again, BNP said.

The PBoC is also expected to further slash the reserve requirement ratio (RRR), which has already been down by 150 basis points to 18.5 percent.

It will also inject more cheap money into the system through PSL — collateralized credit offered by the PBoC to financial institutions to support lending to small and private businesses — and other liquidity facilities, it said.

Funding cost will also go down as local-government borrowings have been constrained and state-owned enterprises’ appetite for investment and borrowing has been curbed by Beijing’s intensifying anti-graft campaign.

BNP also noted that property developers are reining in capital expenditure expansion due to an uncertain industry outlook.

Other favorable factors include a shift from an approval-based initial public offering system to a registration-based system later this year, which will facilitate equity financing and reduce companies’ demand for loans.

Hurdles to corporate bond issuance will be relaxed and banks’ loan-to-deposit ratios are set to be loosened further, it added.

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EJ Insight reporter

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