China's Crackdown On Shadow Banking Paying Off: Moody's

     BEIJING (MNI) - Moody's Investors Service said Monday that China's efforts

to rein in credit growth and the shadow banking sector have shown some results,

but that government authorities were "engaged in a delicate balance" between

maintaining tighter credit and holding off financial instability. 

     In the report, "Quarterly China Shadow Banking Monitor," Moody's said the

gap between overall credit growth and the growth rate of nominal GDP had

narrowed recently. It also said the recent tightened liquidity conditions faced

by banks were partially offset by higher lending by the central bank. In

addition, it said, financial regulators are offering "grace periods" for the

implementation of new regulations. 

     But with a crackdown on shadow banking activities -- in particular,

high-yield off-balance-sheet wealth management products -- Moody's said banking

flows were now "increasingly sustained by formal bank lending and lending by the

comparatively more highly regulated parts of the shadow banking sector, such as

trust companies."

     The shift, Moody's said, has improved transparency in the financial system,

but it "remains unclear whether credit from these sources will be sufficient to

replace credit supplied by the shadow banking components that are now subject to

closer regulatory scrutiny."

     As a result, borrowers that have become dependent on shadow credit, like

property developers and local government financing vehicles, face greater

refinancing risks, Moody's said. 

     Moody's also said new corporate bond issuance hit its highest level in July

since November 2016, with the narrowing of bond yields since mid-June suggesting

that systemic liquidity conditions "have eased somewhat." But the tighter

regulations surrounding bond issuance could be encouraging corporates to access

alternative forms of financing, such as trust loans or formal bank loans,

Moody's added. 

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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