Shadow banking doubles in five years
December 19, 2016 Category Finance, Weekly
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.
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