China shadow banking crackdown to moderate in 2019

China’s crackdown on risky shadow banking activities appears to be gaining traction, with new data showing the sector has shrunk to its smallest level since the end of 2016, but priorities have shifted to maintaining economic growth.

In 2018, shadow banking assets fell by Rmb4.3tn ($640.6bn) to Rmb61.3tn, equating to 68 per cent of GDP, according to data from Moody’s. This is down from a peak of 87 per cent of GDP reached at the end of 2016, when a regulatory crackdown intensified. 

Borrowers in the non-bank lending sector tend to be small businesses, individuals without credit cards and larger companies that have exhausted credit lines at state-owned banks.

The curb on risky non-bank lending has resulted in a shift to formal bank loans, helped by the central bank’s dovish stance designed to encourage lending. However, Moody’s suggests that this shift has only partly offset the steep decline in shadow bank lending, and that privately-owned enterprises have been disproportionately affected by lower credit availability. 

Moody’s expects that the shadow banking crackdown will moderate in 2019, as policymakers shift their focus to supporting growth. “This should help support economic and financial stability, and will marginally alleviate funding pressure on POEs most affected by the contraction in shadow credit supply,” the report said. “However, a rapid rebound in shadow credit supply is also unlikely, as the authorities will retain focus on financial system risks.”

China’s banking regulator issued new guidelines last week to encourage formal lending to small businesses, in an effort to address financing bottlenecks.

Peer-to-peer lending also dropped by 24 per cent year on year at the end of 2018, as hundreds of such providers collapsed.