Moody’s Sheds Light on Chinese Shadow Banking Sector

By Henry Thomas on 29th July 2015

P2P/Marketplace Lending

AltFi recently reported on the introduction of regulation to the Chinese P2P space. Moody's has now released a report into the health of the shadow banking industry. The report shows that, in the face of increasing regulation around shadow finance, P2P lending is outperforming much of the sector.

Moody’s Sheds Light on Chinese Shadow Banking Sector

The report distinguishes between core shadow banking practises: entrusted loans, trust loans and undiscounted bankers' acceptances, and other areas, such as umbrella trusts, e-financing and peer-to-peer lending. The report states:

"Tighter regulation in China has been effective in slowing the growth of core shadow banking activity, other shadow banking activities have been expanding more rapidly"

On the matter of core businesses, Michael Taylor - Moody's Managing Director and Chief Credit Officer for Asia Pacific - added:

"The growth of core shadow banking activities has fallen below the rate of nominal GDP growth in the past quarter as tighter regulations have encouraged credit flows to move toward the formal banking system"

Furthermore, Stephen Schwartz - Moody's Senior Vice President - pointed to the contrasting benefits and costs of fall in the growth rate:

"The contraction in core shadow banking activity and shift in credit flows back towards the formal banking system improves transparency and lowers financial risks, but could also put pressure on sectors that rely on shadow banking, such as small and unrated property developers and other micro and small enterprises"

Schwartz did note, however, that the problem may not be particularly pronounced as overall credit flows have been maintained - with the help of monetary policy easing carried out by the Peoples' Bank of China.

As regulation continues to evolve, and quality standards are raised, reports in the coming months and years may tell a story of more measured growth.

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