Announcement: Moody's: China's shadow banking system continues to grow; leverage increases further

Moody's Investors Service says that overall leverage in China's (Aa3 negative) economy continues to rise, as credit growth -- measured by total social financing (TSF) -- outpaces nominal GDP.

"The growth in overall leverage may be understated, because some of the fastest growing components of shadow banking are not included in TSF," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific.

"We estimate the potential understatement to be significant, amounting to at least RMB16 trillion or 23% of GDP at end-2015, equivalent to around one-third of shadow banking," he adds.

Shadow banking activity has expanded further in 2016, although there has been notable variation among its components. Assets under management by nonbank financial institutions have increased, and there has been a small upturn in trust loans and entrusted loans through the first half of the year. By contrast, undiscounted bankers' acceptances have experienced a sharp decline in response to tighter regulations.

Moody's says TSF flows are being sustained by formal bank credit flows on the back of continued accommodative monetary policy, a trend that has accelerated through the first half of 2016.

Financing flows from the capital market are also contributing, although they have recently levelled off with a modest cooling of bond issuance in Q2 following greater awareness of default risk and increased credit differentiation.

Moody's analysis is contained in its latest Quarterly China Shadow Banking Monitor. The Monitor draws on publicly available data sources to provide an overview of trends and developments in this important component of the Chinese financial system.

"The rise in overall leverage and further expansion of shadow banking activity are pushing up financial risks," adds Stephen Schwartz, a Moody's Senior Vice President. He notes in particular that, "continued growth of banks' investment receivables is increasing the system's interconnectedness, as well as exposing mid-sized and smaller regional banks to liquidity and credit risks."

The investment receivables of a sample of 26 listed banks have more than quadrupled since 2012, accounting for more than 8% of their total assets at end-2015. Investment receivables comprise asset management schemes, wealth management products and bonds. Mid-sized and smaller banks are the most active in this segment.

Finally, Moody's notes that e-finance is also expanding rapidly in China, benefitting from opportunities afforded by an underdeveloped consumer banking system.

The overall share of e-transactions of non-banks remains small in comparison to the volume of bank e-platforms, but is increasing steadily.

Regulators have begun monitoring these e-transactions more closely.