China shadow banking assets grew 30 percent in 2015 - Moody's

HONG KONG (Reuters) - Shadow banking activity in China has expanded further and now accounts for nearly a third of the total banking sector assets, raising financial risks in the world’s second-largest economy, rating agency Moody’s Investor Service said on Wednesday.

A 100 Yuan note is seen in this illustration picture in Beijing March 7, 2011. REUTERS/David Gray/File Photo

Shadow banking assets in China increased by 30 percent last year, reaching almost 54 trillion yuan (6.17 trillion pounds), according to Moody’s estimates.

That is equivalent to about 78 percent of China’s total economic output and 27.6 percent of its banking assets.

In 2011, shadow banking products accounted for 17.2 percent of total banking assets, and the share grew to 24.3 percent in 2014.

China’s crackdown on risky practices in the thinly regulated shadow banking system has taken on fresh urgency amid a growing number of corporate defaults, and as policymakers appear worried about the risks of relying on too much debt-fuelled stimulus.

Despite this, shadow banking’s share in bank loans and total bank assets has expanded rapidly, as sectors and firms reeling from overcapacity and poor credit profiles turn to other sources of funding, and investors hunt for higher yields.

“The rise in overall leverage and further expansion of shadow banking activity are pushing up financial risks,” said the Moody’s report, adding the growth highlights “spillover risks” to the financial system due to its interconnectedness.

Years of breakneck growth for China’s top insurers have been partly fuelled by a splurge on shadow banking-linked products that could punch multi-billion-dollar holes in their balance sheets, a Reuters analysis showed.

Mid-tier Chinese banks are also increasingly using complex instruments to make new loans and restructure existing loans that are then shown as low-risk investments on balance sheets, masking the scale and risks of the slowing economy.

The takeover tussle embroiling top Chinese developer China Vanke 2202.HK has also showed how local banks are increasingly exposed to highly volatile domestic stock markets through shadow lending products.

“The increasing size of the shadow banking system means that during a disorderly contraction, banks could have difficulty replacing shadow banking credit, leaving borrowers who rely on such financing at risk of a credit crunch,” Moody’s said.

Reporting by Sumeet Chatterjee; Editing by Kim Coghill