Tightened financial oversight in China is deepening its impact across the shadow banking sector, which will further reduce the sector's contribution to total social financing flows in 2018, according to the latest quarterly report from Moody's Investors Service.
During 2017, Chinese shadow banking assets increased by one tenth of the amount of the previous year, growing 1.1 trillion yuan (4.3 billion) versus 11.2 trillion yuan in 2016, according to Moody's calculations.
China's shadow banking activity also fell as a percentage of GDP for the first time since 2012, falling to 79.3 percent at the end of 2017, from the peak of 86.7 percent at the end of 2016, said George Xu, a Moody's analyst and the report's main author.
Xu added that the drivers of the slowdown were declines in some previously fast-growing shadow banking segments such as the banks' wealth management products and non-bank financial institutions' asset management plans. These two activities have been "the focus" of the authorities' coordinated regulatory actions since the second half of 2016.
Moody's said that enhanced regulation initially focused on the increasing connection between banks and shadow banks, targeting in particular the buildup of leverage in the financial sector.
But now the regulatory crackdown has spread to other major core shadow banking components, said Michael Taylor, managing director and chief credit officer for Asia Pacific at Moody's.
Amid the tightened oversight, the aggregate growth of entrusted loans, trust loans and undiscounted bankers' acceptances has slowed. The situation will further curb broad shadow banking growth in 2018 and cut its contribution to total social financing flows.
"These measures will likely reduce the supply of credit to more marginal borrowers, who are most dependent on shadow finance," Xu said, adding that refinancing risks will rise for some sectors.