Assets held in China’s shadow banking system have doubled in size in the last five years, and were equal to 82% of gross domestic product (GDP) at the end of June, according to Moody’s Investors Service. The sector is also becoming increasingly interconnected with the formal banking system, with the value of outstanding wealth management products issued and distributed by banks continuing to expand, and now worth 37% of GDP. Separately, wealth management products accounted for 41% of the wholesale investment market, up from 32% at the end of 2014. Sean Hung, Vice President at Moody’s, said the rising level of interconnectedness between the formal banking system and the shadow banking system presented “another source of risk for Chinese banks”. He also warned the Chinese banking system is facing increasing levels of bad loans, while credit costs are also rising. The Moody’s study shows non-performing loans (NPLs) in Chinese banks accounted for 1.76% of gross loans at the end of September, up from 1.67% at the end of last year and 1.25% at the end of 2014. “A deterioration in the asset quality of banks is taking place against the backdrop of a deceleration in GDP growth and rising financial leverage,” Hung said. He also warned that the liabilities of state-owned enterprises (SOEs) had increased and reached nearly 120% of GDP at the end of September, adding that mid-size and small banks are increasingly becoming reliant on wholesale funding to support their longer-term investments, challenging their ability to manage liquidity. Nonetheless, overall liquidity in the Chinese banking system will remain stable, he said, as reported by the South China Morning Post.

China’s major banks are seemingly taking a “wait-and-see” approach to being future custodians for the nation’s growing number of peer-to-peer (P2P) lending firms, whose reputation has been hit hard by a series of high-profile fraud cases. P2P lending platforms act as intermediaries that connect people with small sums of spare cash to people in need of small loans. As unlicensed, non-financial firms, they cannot sell investment products, collect deposits or pool the funds they take in. A custodian is a financial institution that holds customers’ securities for safekeeping to minimize the risk of theft or loss. Securities and other assets can be held in electronic or physical form and since the custodians are responsible for the safety of assets and securities that may be worth billions of yuan, they generally tend to be large and reputable firms. By law, all P2P platforms need to have the backing of a registered bank by August 2017, after being given effectively a 12-month grace period to meet the mandatory requirement. Outstanding credit in the P2P industry stood at CNY800 billion by the end of November, according wdzj.com, a website tracking the industry, giving an illustration of the scale of the capital to be put under custody. So far, however, the country’s so-called “Big-Four” state-owned banks are yet to act as custodian to any P2P platforms, with only smaller lenders – mostly city commercial banks – dominating the segment, the South China Morning Post reports. By December 2, wdzj.com estimated that 74 platforms had introduced a bank custody system, accounting for just 3% of the industry total.

China is no longer the biggest foreign creditor to the U.S. government, according to the U.S. Treasury Department. China has reduced its holdings of U.S. Treasury bonds in recent months to raise funds to mitigate capital flight and defend its currency, and is expected to keep doing so now that a rate increase by the U.S. Federal Reserve has started a new round of yuan depreciation. China cut its holdings by USD41.3 billion in October and a total of USD127 billion in the past six months. It now holds USD1.12 trillion, giving the No 1 title to Japan, which sold off less last month. “U.S. monetary policy has exerted great pressure on foreign central banks because of the globalization of financial markets,” said Tim Condon, Chief Asia Economist for ING. Beijing’s real exposure to U.S. treasuries might be bigger because it uses proxy holders. It has never made its holdings of U.S. government debt public. The composition of its USD3 trillion in foreign exchange is a state secret.

European companies in Shanghai report that they are still expanding this year, and their focus will be on high technology and advanced manufacturing for the future, said the European Union Chamber of Commerce Shanghai Chapter. 71% of Shanghai-based European companies reported positive earnings before interest and tax in 2016. 20% of the companies posted substantial increases in revenue of above 20%, according to the Shanghai position paper published by the Chamber in China. “The businesses of European companies in Shanghai are still growing this year,” said Michael Adams, Chairman of the Chamber’s Shanghai Chapter. High-technology, research and development and advanced manufacturing are the key focus of European firms in Shanghai this year.

The Shanghai Position Paper 2016/2017 can be downloaded here.

China has launched a dispute resolution case at the World Trade Organization (WTO) over the surrogate country approach used by the United States and European Union to calculate anti-dumping measures against Chinese exports. When China joined the WTO in 2001, it agreed to let WTO members treat it as a non-market economy when assessing dumping duties for 15 years. That gave trade partners the advantage of using a third country’s prices to gauge whether China was selling its goods below market value. But that clause expired on December 11, and China has demanded that countries abide by the agreement. U.S. Commerce Secretary Penny Pritzker said in November the time was “not ripe” for the United States to change the way it evaluates whether China has achieved market economy status, and there was no international trade rules requiring changes in the way U.S. anti-dumping duties are calculated. China’s Commerce Ministry said in a statement that 15 years on, all WTO members had an obligation to stop using the surrogate country approach. “Regretfully, the United States and European Union have yet to fulfil this obligation,” the Ministry said.

Separately, a Ministry official said in another statement that a U.S. investigation into what it regards as Chinese dumping of plywood products launched last week amounted to abuse of emergency trade relief measures, the Shanghai Daily reports. After 60 days, if the consultations, which are usually held in Geneva, fail to resolve the dispute, the complainant may request adjudication by a panel selected by the WTO. The defendant party has the right to challenge the panel’s ruling within a year. Under such circumstances, a final adjudication will be made by a WTO committee within 90 days. The WTO will give 15 months to the defendant to carry out the final order. If the defendant does not follow the final decision within this period, the complainant party could apply trade retaliation measures. China imported USD1.88 trillion of goods from the EU between January and November this year.