China’s shadow banking poses systemic risks to the nation’s financial industry after expanding by more than 67 percent over the past two years, according to Moody’s Investors Service.
A broad measure of the shadow industry, which includes private lending, trust loans, credit from non-bank institutions and banks’ off-balance-sheet deposits known as wealth management products, totaled 29 trillion yuan ($4.7 trillion) by the end of last year, Moody’s said in the latest report. That compared with 17.3 trillion yuan in 2010.
Moody’s last month lowered its outlook for China’s credit rating to stable from positive, saying the nation had made less progress than expected in reducing risks from credit expansion and local-government debt. A week earlier, Fitch Ratings Ltd. cut its long-term local-currency debt rating on the country, citing threats to financial stability.
“Given the substantial scale and growth of shadow banking activities in China, we are doubtful of the banks’ ability to isolate themselves from a significant increase in defaults in the shadow banking domain,” Moody’s analysts led by Hu Bin wrote in the report.
Estimates of China’s shadow banking sector range from 2 trillion yuan from the Financial Stability Board to as large as 36 trillion yuan from JPMorgan Chase & Co.
The China Banking Regulatory Commission in March told banks to cap investments of client money in debt that isn’t publicly traded at 35 percent of all funds raised from the sale of wealth management products. These investments, held in instruments such as trust loans, letters of credit and corporate receivables, are also limited to 4 percent of the lender’s total assets at the end of the previous year.
Chinese banks have sold wealth management products offering higher returns than deposits as a way to retain client funds and attract new ones. The outstanding balance of the products reached 7.1 trillion yuan at the end of 2012, according to official data.