China’s shadow banking system now 78pc of GDP and growing, says Moody’s

China’s shadow banking system continues to expand at a torrid clip amid strong demand for credit, with assets held by these less-regulated lenders equivalent to 78 per cent of annual economic output at the start of the year, according to Moody’s Investors Service.

The credit rating agency’s July Shadow Banking Monitor report, showed credit growth – as measured by total social financing (TSF) – rose 11 percentage points in the first half of 2016 to 217 per cent at the end of June, outpacing nominal GDP.

“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.

However, the report also said that TSF, in its measurement of credit growth in the financial system, fails to capture up to one-third of shadow banking activity.

In particular, TSF misses fast growing shadow banking segments such as assets funded by wealth management products (WMPs), which accounted for 40 per cent of the stock of shadow banking finance as of end-2015, and which nearly doubled as a share of banking assets to 11 per cent.

Those components of shadow banking that are not directly included in total social financing have expanded rapidly, to comprise 59 per cent of total shadow banking at the end of 2015, up from 40 per cent at the end of 2012.

“We estimate the difference between broad shadow banking and the portion captured by TSF, which is growing, to be at least 16 trillion yuan at end-2015 (23 per cent of GDP), or 30 per cent of total shadow banking,” the report said.