Quarterly China Shadow
Banking Monitor
FEBRUARY, 2018
Quarterly China Shadow Banking Monitor, February 2018 2
Quarterly China Shadow Banking Monitor
1. Key Messages
2. Credit Conditions
(a) Liquidity Conditions
3. Composition and Trends of Shadow Banking
(a) Wealth Management Products
(b) Trust Sector
4. Interconnectedness and Spillover Risks to Banks
5. The Growth of e-finance
6. Regulatory Updates & Market Events
Appendix: Glossary, Notes on Estimates & Data Sources
1 Key Messages
Quarterly China Shadow Banking Monitor, February 2018 4
Key Messages
» Total shadow banking assets barely grew in 2017. Assets increased at one tenth of the amount of the previous year – an
increase of trillion compared with trillion in 2016. Shadow banking also declined as a percentage of GDP,
falling to % at the end of 2017, compared to a peak of % a year earlier.
» Intensified regulation is having a growing impact across the shadow banking sector. What started as a regulatory
crackdown on some previously fast-growing shadow banking segments, such as banks’ wealth management products (WMPs)
and non bank financial institutions’ (NBFIs) asset management plans, has spread to other major core shadow banking
components. In particular, the aggregate growth of entrusted loans, trust loans and undiscounted bankers’ acceptances has
slowed due to tightened oversight. This will further constrain broad shadow banking growth in 2018 and reduce its contribution to
total social financing (TSF) flows.
» The effect of intensified regulation is no longer just on de-risking the financial sector, but it is now beginning to impact
the supply of credit to the real economy. Enhanced regulation initially focused on the increasing interconnectedness between
banks and shadow banks, targeting in particular the buildup of leverage in the financial sector. These measures have
successfully reduced the share of WMPs held by interbank investors and banks’ net claims on NBFIs in the past six months.
However, more recent measures target core shadow banking activities which have been an increasing source of credit supply to
the real economy in 2017. These measures are likely reduce the supply of credit to more marginal borrowers which have been
most dependent on shadow finance. In consequence, refinancing risks are increasing for some sectors such as property
developers, local government financial vehicles (LGFVs), and companies from overcapacity and polluting industries.
» Liquidity conditions continue to tighten and are particularly great for smaller banks and non-bank financial institutions.
Tighter liquidity is indicated by a variety of market measures, including the rates on Negotiable Certificates of Deposit (NCDs)
and on banks’ WMPs. To off-set the impact of tighter liquidity the People's Bank of China (PBOC) has continued to expand direct
lending to banks with an increasing use of medium-term liquidity facilities. However, non-bank financial intermediaries may also
be facing liquidity pressures, as indicated by a year-end spike in the repo rate that applies to these institutions and their greater
reliance on wholesale funding in the interbank market.
» Tighter domestic liquidity conditions may be pushing some borrowers off-shore. There are indications that the domestic
bond market is being affected by tighter financing conditions with a growing number of domestic bond issues being cancelled or
delayed. Combined with the regulatory crackdown on shadow banking, some borrowers that had previously relied on shadow
finance – such as smaller property developers and LGFVs – may now be turning to the offshore market to meet their funding
needs.
2 Credit Conditions
Quarterly China Shadow Banking Monitor, February 2018 6
» Total shadow banking assets* increased by only trillion in 2017 to end the year at
trillion. This compared with an increase of trillion in 2016.
» Annual nominal GDP grew faster than shadow banking assets for the first time since 2012. This led to
a drop in shadow banking as a share of GDP to % at the end of 2017, compared to a peak of
% a year earlier.
» The drivers of the slowdown were declines in banks’ wealth management products (WMPs) and non
bank financial institutions’ (NBFIs) asset management plans. These two shadow bank activities have
been the focus of the regulators’ coordinated regulatory actions since the second half of 2016.
* As defined in Slide 21
Sources: Moody’s Investors Service, National Bureau of Statistics and PBOC
Shadow banking barely grew in 2017
0
20
40
60
80
100
0
50
100
150
200
250
2011 2012 2013 2014 2015 2016 2017E
%
R
M
B
tr
illi
on
Shadow banking Bank loans Total bank assets (including bank loans) Shadow banking as % of GDP (RHS)
Quarterly China Shadow Banking Monitor, February 2018 7
Slowdown broadens to “core” products
» Our adjusted TSF series* shows overall credit growth moderated further toward the end of 2017.
Reflecting tighter regulations, growth in “core” shadow banking activities, including entrusted loans,
trust loans, and undiscounted bankers’ acceptances (all included in TSF) decelerated in the fourth
quarter of 2017, after four straight quarters of acceleration.
» The slowdown in credit growth could be even more pronounced because some elements of shadow
banking, such as non-standard debt assets (see slide 53) funded by banks’ WMPs and NBFIs’ asset
management plans, are not included in official TSF definition.
* Total social financing (TSF) is an official measure of broad credit in the financial system consisting of formal bank loans, shadow banking activities, direct financing (bond and equity
issuance) and others (. microcredit). The series shown above reflects our adjustments: (1) to exclude equity financing and (2) from May 2015 onwards to account for distortions from
the local government debt swap program (see slide 56), resulting in an upward revision to the series of ppts in year-over-year growth as of December 2017.
^ Core shadow banking activities include entrusted loan, trust loan and undiscounted bankers’ acceptances in TSF.
Sources: Moody’s Investors Service and PBOC
0
10
20
30
40
%
y
ea
r-
on
-y
ea
r
Nominal GDP Outstanding adjusted total social financing* Core shadow banking^
Quarterly China Shadow Banking Monitor, February 2018 8
* See Banks: China’s tighter regulation on banks’ entrusted loans is credit positive, January 2018
^ Core shadow banking components include entrusted loan, trust loan and undiscounted bankers’ acceptances in the TSF
Sources: Moody’s Investors Service and PBOC
» Core shadow banking growth decelerated in the fourth quarter of 2017, bringing to an end a year-long
rebound. The deceleration was mainly driven by sluggish growth of entrusted loans, while trust lending
activities remained robust.
» Regulators have recently stepped up efforts to tighten oversight of trust loans and entrusted loans.
New guidance on banks’ entrusted loans will further reduce the contingent liabilities banks can incur
from these products*, while tighter scrutiny on the channel business via bank-trust cooperation
arrangements will limit the room for regulatory arbitrage (see slide 34). These measures will further
restrain core shadow banking growth in 2018.
Entrusted loans lead deceleration of
core shadow banking activity
-20
-10
0
10
20
30
40
%
y
ea
r-
on
-y
ea
r
Entrusted loans Trust loans Undiscounted bankers' acceptances Core shadow banking growth^
Quarterly China Shadow Banking Monitor, February 2018 9
» Formal bank lending has taken an increasing share of credit supply, rising to 71% of TSF last year, the
highest level since the start of the decade. This reflects the relative decline in corporate bond financing
as well as tightened regulations on shadow banking activities.
» Despite the Q4 slowdown in their growth, the share of core shadow banking components in new TSF
flows tripled to around 18% in 2017 from 6% in 2016.
Sources: Moody’s Investors Service and PBOC
Rotation of credit supply to banks’ balance sheets
drives up share of bank lending in TSF flows…
0%
20%
40%
60%
80%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Formal bank loans as % of TSF Core shadow banking as % of TSF Direct financing as % of TSF
Quarterly China Shadow Banking Monitor, February 2018 10
But the rotation back to the banks
has its limits
» Lending quotas, capital and liquidity constraints all limit the extent to which the ongoing rotation of
credit supply back to the banks can continue.
» The weak reading of new bank loans in December 2017 could have been constrained by annual
lending quotas.
» Moreover, banks may encounter capital and liquidity constraints if they seek aggressively to expand
their loan books.
* Core shadow banking components comprise entrusted loans, trust loans and undiscounted bankers’ acceptances in TSF.
Sources: Moody’s Investors Service and PBOC
-1
0
1
2
3
4
R
M
B
tr
illi
on
Net core shadow bank* credit flow Net formal bank credit flow Net direct finance flow
Quarterly China Shadow Banking Monitor, February 2018 11
» December saw formal bank loans grow at their slowest pace during H2 2017. The year-end slowdown
was driven by mainly weaker growth in medium to long-term corporate loans, which reflected the
impact from annual lending quota constraints.
» The contribution from household mortgage loans to headline bank lending further weakened in Q4
2017, reflecting ongoing measures to cool the property market. Short-term consumer loans also
stopped growing, following tighter regulatory scrutiny to prevent their use for home purchase.
Sources: Moody’s Investors Service and PBOC
Both corporate and household loans
soften
-3
0
3
6
9
12
15
Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17
%
y
ea
r-
on
-y
ea
r
Households - Short-term loan Households - Medium to long-term loan Corporates - Short-term loan & bill financing
Corporates - Medium to long-term loan Others Growth of bank loans to non-financial sector
Quarterly China Shadow Banking Monitor, February 2018 12
Corporate bond issuance slips on rising
spreads
» The pick-up in new corporate bond issuance in the third quarter proved to be temporary as new
issuance declined again in the fourth quarter. Sluggish corporate bond financing in 2017 was a drag
on direct funding in the new TSF flows (see slide 9).
» Corporate bond yield spreads* have widened again across the maturity spectrum since November,
reflecting tighter overall credit conditions.
» The ongoing regulatory clampdown to restrict leverage of bond repurchase (or repo) and reverse repo
transactions by financial institutions, with transactions without formal agreements being banned, could
further dampen future demand for longer-tenor corporate bonds.
Note: Corporate bond ratings are of domestic rating agencies, rather than Moody’s Investors Service.
* Spreads between treasury bonds and corporate bonds of the same maturities
Sources: Moody’s Investors Service and Wind
0
100
200
300
400
500
0
1
2
3
4
5
6
R
M
B
b
illi
on
C
or
po
ra
te
B
on
d
Y
ie
ld
S
pr
ea
ds
*
(D
om
es
tic
R
at
in
g,
3
-Y
ea
r)
New corporate bond issuance (RHS) A+ rated corporate bonds AA- rated corporate bonds
AA rated corporate bonds AA+ rated corporate bonds AAA rated corporate bonds
Quarterly China Shadow Banking Monitor, February 2018 13
Cases of cancellation or delay of bond
issuance are on the rise
» A further indication of tighter domestic financing conditions is that more than 700 cases of bond
issuance were delayed or cancelled in 2017, mainly by non-financial corporate issuers. The amount
involved totaled over RMB600 billion, up from around RMB550 billion in 2016.
Sources: Moody’s Investors Service and Wind
0
200
400
600
800
0
200
400
600
800
2014 2015 2016 2017
N
um
be
r o
f O
ns
ho
re
B
on
ds
To
ta
l A
m
ou
nt
o
f O
ns
ho
re
B
on
ds
D
el
ay
ed
o
r C
an
ce
lle
d
(R
M
B
b
illi
on
)
Q1 Q2 Q3 Q4 Number of Onshore Bonds Delayed or Cancelled-Annual (RHS)
Quarterly China Shadow Banking Monitor, February 2018 14
Property developers, LGFVs turn to
offshore bond market
» A growing number of Chinese non-financial corporates, especially property developers and LGFVs,
have tapped offshore bond market for financing in 2017. Total amount of US dollar-denominated
bonds issued by Chinese property developers nearly tripled in 2017 to reach USD35 billion for the full
year.
» This trend provides further evidence of tight domestic financing conditions and is likely to continue
during 2018 as regulatory measures continue to constrain onshore credit supply.
Sources: Moody’s Investors Service and Dealogic
0
20
40
60
80
100
120
2013 2014 2015 2016 2017
U
S
d
ol
la
r-
de
no
m
in
at
ed
B
on
ds
in
th
e
O
ffs
ho
re
M
ar
ke
t b
y
C
hi
ne
se
Is
su
er
s
(U
S
D
b
illi
on
)
Total non-financial corporates Property developers LGFVs
2a Liquidity Conditions
Quarterly China Shadow Banking Monitor, February 2018 16
» Liquidity conditions have tightened in parallel to tighter financing conditions. In parallel to the
intensified regulation of shadow banking, the PBOC also tightened monetary policy modestly following
the US Federal Reserve’s interest rate decision in December. The PBOC raised reverse repo rates (7-
day and 28-day), and interest rates on its standing lending facility (SLF) and the medium-term lending
facility (MLF) by 5 bps.
» The interbank repo rate for all financial institutions (R007) spiked in the end of 2017, while that
exclusive to depositary institutions (DR007) remained relatively stable. Significant volatility of the
R007 may suggest that non-bank financial intermediaries are more vulnerable to tightening liquidity
conditions.
Liquidity conditions are also tightening
Sources: Moody’s Investors Service and Wind
2
3
4
5
6
7
Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18
%
SHIBOR 7D Interbank Repo Rate 7D (R007) Interbank Repo Rate 7D (DR007)
PBOC Reverse Repo Rate 7D Standing Lending Facility 7D (SLF)
Quarterly China Shadow Banking Monitor, February 2018 17
* See Banks: China’s regulation on banks’ liquidity will help curtail shadow-banking, December 2017
Sources: Moody’s Investors Service and Wind
» Issuing rates for interbank NCDs for small and midsize banks jumped again towards the end of 2017,
after having remained elevated throughout the year.
» Starting in 2018 a China Banking Regulatory Commission (CBRC) regulation will include NCDs as part
of banks’ wholesale funding and thus subject to a cap of 1/3 of their total liabilities under the Macro
Prudential Assessment (MPA) framework.
» While the latest CBRC liquidity regulation* will further reduce banks’ reliance on short-term wholesale
funding, the small and midsize banks most affected by the regulation will need time to wind down their
investment portfolios.
Liquidity conditions tightest for small
and midsize banks
Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17
In
te
rb
an
k
C
D
(3
M
) I
ss
ui
ng
R
at
e,
%
Joint-stock banks City commercial banks Rural commercial banks
Quarterly China Shadow Banking Monitor, February 2018 18
» Full year issuance of NCDs reached trillion, compared with trillion and
trillion in the previous two years. However, there was a slight decline in the outstanding balance of
NCDs in the final quarter.
» City commercial banks and joint stock banks continued to dominate the primary market of new NCDs in
2017, accounting for 44% and 42% of total NCDs issuance respectively, followed by rural commercial
banks (12%). Tighter regulatory measures are likely to weigh on the pace of new NCDs issuance in
2018.
Sources: Moody’s Investors Service and Wind
New NCD issuance remained strong
in 2017, but is likely to slow down
0%
20%
40%
60%
80%
In
te
rb
an
k
N
C
D
s
Is
su
an
ce
A
m
ou
nt
R
M
B
tr
illi
on
State-owned banks Joint-stock banks City commercial banks
Rural commercial banks Others As % of total bond issuance (RHS)
Quarterly China Shadow Banking Monitor, February 2018 19
PBOC’s direct lending to banks
continues to expand
» To off-set tightening systemic liquidity, the PBOC continues to expand its lending to the banking
system. Claims on other depository corporations (mainly policy and commercial banks) have further
increased by trillion in Q4 2017. Their share of the central bank’s balance sheet rose to
%, up from % in the previous quarter.
» The PBOC is making increased use of targeted liquidity instruments, such as the medium-term
lending facility (MLF) and pledged supplementary lending (PSL). A gradual shift towards MLF as key
liquidity provision channel benefits banks’ funding structure and forms part of the MPA policy
framework.^
* Note: Foreign assets mainly include foreign reserves, monetary gold and other foreign assets held by the central bank.
^ See Banks – China: PBOC’s increasing use of medium-term facilities is credit positive for banks, November 2017
Sources: Moody’s Investors Service and PBOC
0%
20%
40%
60%
80%
100%
P
B
O
C
c
la
im
s
(%
o
f t
ot
al
a
ss
et
s)
Foreign assets* Claims on central government Claims on other depository corporations Claims on NBFIs Other assets
3 Composition and Trends of Shadow Banking
Quarterly China Shadow Banking Monitor, February 2018 21
B
ro
ad
sh
ad
ow
b
an
ki
ng
C
or
e
sh
ad
ow
ba
nk
in
g
Credit Intermediation
Products
End-
2017
(RMB
trillion)
As % of
total
banking
assets
(%)
End-
2016
(RMB
trillion)
As % of
total
banking
assets
(%)
End-
2015
(RMB
trillion)
As % of
total
banking
assets
(%)
End-
2014
(RMB
trillion)
As % of
total
banking
assets
(%)
End-
2013
(RMB
trillion)
As % of
total
banking
assets
(%)
Entrusted loans
Trust loans
Undiscounted bankers’
acceptances
Assets funded by WMPs
Banks’ off-balance sheet
Securities firms and funds
Loans by finance companies
Informal lending*
Others†
TOTAL
Memorandum Items
Credit guaranteed by financial
guarantee companies n/a n/a
Core shadow banking as % of
broad concept
* Assumes no change from 2011 (please see slide 55 for details)
† Includes financial leasing, microcredit, pawn shop loans, online “peer-to-peer” lending, asset-backed securities and consumer credit companies
Source: See slide 55
Shadow Banking Components
Quarterly China Shadow Banking Monitor, February 2018 22
» Assets funded by wealth management products, an especially fast growing shadow banking
component before 2017, declined as a share of overall outstanding shadow banking assets to 40% at
end-2017 from the peak level of 47% at end-2016.
» By contrast, the share of core shadow banking components increased by nearly 5 percentage points in
the past year, mainly driven by growth in trust loans. The regulatory crackdown on shadow banking
activities will likely continue in 2018 and beyond, with the core components coming under renewed
regulatory scrutiny.
^ Assets include off-balance sheet bank WMPs and asset management plans by securities firms and subsidiaries of fund companies
* Others includes loans by finance companies, informal lending, financial leasing, microcredit, pawn shop loans, online “peer-to-peer” lending asset-backed securities and consumer
credit companies
Source: Moody’s Investors Service
Coordinated regulatory actions shrink
WMP share of shadow banking
15% 13% 10% 10% 13%
22% 23%
21% 20% 21%
21% 17%
11% 6%
7%
20% 27%
40% 47% 40%
22% 21% 18% 17% 19%
0%
20%
40%
60%
80%
100%
2013 2014 2015 2016 2017
A
s
%
o
f t
ot
al
s
ha
do
w
b
an
ki
ng
a
ss
et
s
Trust loans Entrusted loans Undiscounted bankers’ acceptances Assets funded by WMPs^ Others*
Quarterly China Shadow Banking Monitor, February 2018 23
» Asset under management by CSRC-regulated NBFIs declined further in Q3 2017, reflecting the
impact from enhanced regulations.
» New regulatory measures continue to be unveiled. In November 2017, China’s regulatory authorities,
including PBOC, CBRC, CSRC, CIRC and SAFE^ jointly released new guidelines to further tighten
scrutiny on the broad asset management business. The guidelines aim to reduce the
interconnectedness among financial institutions, expose credit risk hidden behind multi-layers of
credit transactions through asset management products, and address liquidity risks arising from
aggressive duration mismatch.* If implemented the guidelines would be credit positive for both banks
and NBFIs.
^ The China Securities Regulatory Commission (CSRC), the China Insurance Regulatory Commission (CIRC) and the State Administration of Foreign Exchange (SAFE)
* See China’s new guidelines on asset management products are credit positive, November 2017
Sources: Moody’s Investors Service, China Trustee Association and Asset Management Association of China
New regulations impact asset
management
0
5
10
15
20
25
Trust companies Fund companies and subsidiaries Securities firms Insurers
R
M
B
tr
illi
on
2014 2015 2016 2017Q1 2017Q2 2017Q3
3a Wealth Management Products
Quarterly China Shadow Banking Monitor, February 2018 25
Sources: Moody’s Investors Service, China Banking Wealth Management Product Registration & Depository Center, PBOC, CBRC and China Banking Association
» Growth of outstanding balance of WMPs issued or distributed by banks decelerated to only % as of
December 2017 from a year ago compared with growth of % as of June 2017 and % for 2016
as a whole.
» Growth of banks’ outstanding WMPs is likely to remain subdued in 2018 on tighter regulatory oversight.
A notice released by CBRC in January 2018 indicates the regulator will conduct stricter inspections on
banks’ WMPs businesses that are related to multi-layered investments, interbank transactions and off-
balance sheet activities.
Growth in outstanding bank WMPs
stalling
0
20
40
60
80
100
120
0
5
10
15
20
25
30
2008 2009 2010 2011 2012 2013 2014 2015 2016 1H2017 2H2017
%
R
M
B
tr
illi
on
WMPs outstanding (LHS) % Year-over-year growth (RHS) % of deposits (RHS)
Quarterly China Shadow Banking Monitor, February 2018 26
» Outstanding WMPs issued by joint-stock banks decreased % year-on-year to trillion at
end-2017. While joint-stock banks remained the largest issuer of outstanding WMPs, their share
declined to % from % at end-2016.
» In contrast, outstanding WMPs issued by state-owned banks and city commercial banks still registered
gains of % and %, respectively, in 2017. This led to a marginal increase in their shares of total
outstanding WMPs over the same period.
Note: numbers in brackets are year-over-year growth of outstanding WMPs for each group
Sources: Moody’s Investors Service, China Banking Wealth Management Product Registration & Depository Center, CBRC, Wind
Decline in joint-stock banks’ WMP
issuance
(75%)
(34%)
(81%)
(98%)
(24%)
(9%)
(43%)
(80%)
(8%)
(3%)
(17%)
(13%)
(-2%)
(6%)
(7%)
(-4%)
0
3
6
9
12
15
Joint-stock banks State-owned banks City commercial banks Rural financial institutions
R
M
B
tr
illi
on
2014 2015 2016 1H2017 2H2017
Quarterly China Shadow Banking Monitor, February 2018 27
Note: Interbank investor now includes both banks and NBFIs, according to the new definition by the source.
Sources: Moody’s Investors Service, China Banking Wealth Management Product Registration & Depository Center
» Outstanding WMPs purchased by interbank investors fell by trillion in 2017, and their share of
total outstanding WMPs decreased to 11%. The share of WMPs held by individual investors increased
to 49%.
» The decline in wholesale holdings in WMPs suggests that regulatory measures are beginning to
reduce system interconnectedness. However, a shift in the WMP investor base from wholesale to retail
could increase banks’ funding cost, especially for small and midsize banks.
Interbank WMPs shrink further
0%
10%
20%
30%
40%
50%
0
3
6
9
12
15
2H2016 1H2017 2H2017
%
o
f t
ot
al
W
M
P
s
R
M
B
tr
illi
on
WMPs held by interbank investors WMPs held by individual investors
Share of WMPs held by interbank investors (RHS) Share of WMPs held by individual investors (RHS)
Quarterly China Shadow Banking Monitor, February 2018 28
Note: Money market instruments consist of financial assets held under repo agreement, due from banks and other financial institutions, and other standard financial assets.
Sources: Moody’s Investors Service, China Banking Wealth Management Product Registration & Depository Center, PBOC, CBRC and China Banking Association
» The share of WMP assets that are invested in equity-like products and other investments increased
notably to % at end-2017 compared with % at end-2016
» Bonds (mainly corporate sector bonds) remained the largest asset class underlying bank-issued
WMPs, despite a decline in their share throughout 2017.
» Public disclosure is lacking WMP investments, in terms of their industry exposures, underlying
investments and ultimate borrowers. Multiple layers of credit transactions also hinder transparency.
Many WMP investments could have high single-industry or borrower exposures.
Asset composition of WMPs shifts
to equity-like products and others
% %
% %
% %
% %
% %
% %
% %
%
%
% % % %
0%
20%
40%
60%
80%
100%
2014 2015 2016 2017
W
M
P
A
ss
et
B
re
ak
do
w
n
Bonds Non-standard debt assets Money market instruments Cash and deposits Equity-like products and others
Quarterly China Shadow Banking Monitor, February 2018 29
» Off-balance sheet WMPs were one of the key drivers behind the rapid expansion of shadow banking
sector. They are not principal protected products but usually come with the issuing banks’ implicit
guarantees, a practice that regulators discourage.
» Following the inclusion of off-balance sheet WMPs into the PBOC’s MPA framework from Q4 2017,
the outstanding balance of off-balance sheet WMPs fell 4% year-on-year at the end of 2017. As a
share of total outstanding WMPs, off-balance sheet WMPs fell to 75% down from a peak of 80% a
year ago.
Decline in outstanding off-balance
sheet WMPs
Sources: Moody’s Investors Service and China Banking Wealth Management Product Registration & Depository Center
60%
65%
70%
75%
80%
85%
0
5
10
15
20
25
30
35
2013 2014 2015 2016 2017
%
o
f t
ot
al
o
ut
st
an
di
ng
W
M
P
s
R
M
B
tr
illi
on
Non principal protected Principal protected Share of Non principal protected (RHS)
Quarterly China Shadow Banking Monitor, February 2018 30
» WMPs with short maturities below 3 months are still dominant among newly issued products,
accounting for more than half of the total volume, but their share has been declining for five straight
quarters.
» The proportion of newly issued WMPs with maturities of three to twelve months inched up to % in
Q4 2017 from % in the previous quarter.
Sources: Moody’s Investors Service and Wind
Narrowing maturity mismatch between
WMPs and underlying assets
45
50
55
60
65
70
0
10000
20000
30000
40000
%
U
ni
ts
< 1 month 1-3 months 3-6 months 6-12 months 1 year or above Share of WMPs below 3 months (RHS)
Quarterly China Shadow Banking Monitor, February 2018 31
» The spread between expected yields on WMPs and 1-year benchmark deposit rate widened
throughout 2017, reflecting increasingly tight liquidity conditions. Current expected annual yields on
newly issued WMPs are around 100 bps higher than a year ago.
» This implies higher short-term funding costs for small and midsize banks, which have relied the most
on WMPs for funding.
Sources: Moody’s Investors Service, PBOC and Wind
Spread between WMP yields and
deposit rates widens further
0
2
4
6
8
%
Average expected annual return of new WMPs (1-Year) 1-Year deposit rate cap 1-Year deposit rate (benchmark)
removal of deposit
rate cap
3b Trust Sector
Quarterly China Shadow Banking Monitor, February 2018 33
Sources: Moody’s Investors Service and China Trustee Association
» The trust sector expanded by around 30% in terms of outstanding lending in the first three quarters of
2017. Tighter regulations on CSRC-regulated securities firms and fund subsidiaries have increased
the use of trust loans as as pass-through channels for banks and shadow credit.
Trust loans grew as regulation targeted
other segments
0
2
4
6
8
0
2
4
6
8
10
%
R
M
B
tr
illi
on
Loans made by trusts (LHS) Trust loan as % of bank loan (RHS)
Quarterly China Shadow Banking Monitor, February 2018 34
Sources: Moody’s Investors Service and China Trustee Association
» Trust lending to corporate borrowers, real estate, and infrastructure sectors increased markedly in the
first three quarters of 2017.
» In December 2017, CBRC tightened scrutiny on banks’ funding practice to property developers,
LGFVs, and companies from overcapacity industries through the bank-trust cooperation business,
which allows banks to channel credit to these sectors by investing in trust plans while skirting the
regulators’ loan quotas and lending restrictions. As a result, borrowers relying on this funding channel
could face higher refinancing risks.
Trust sector assets shifting to corporates,
property and infrastructure sectors
-500
0
500
1,000
1,500
Non-financial
enterprises
Real estate Infrastructure Financial institutions Stocks Bonds
N
et
C
ha
ng
e
of
T
ru
st
A
ss
et
s
(R
M
B
b
illi
on
)
2016 2017Jan-Sep
Quarterly China Shadow Banking Monitor, February 2018 35
Sources: Moody’s Investors Service and China Trustee Association
» Trust sector lending to LGFVs rebounded in the third quarter of 2017, evidenced by a pickup in the
outstanding trust-government cooperation business. Trust companies structure a trust plan for local
governments or LGFVs, raising funds to finance long-term infrastructure projects and municipal
construction. The main sources of repayment include government fiscal revenue and land transfer
income.
Trust lending to LGFVs has picked
up again
-10
0
10
20
30
40
50
%
y
ea
r-
on
-y
ea
r
R
M
B
tr
illi
on
Trust sector lending to LGFVs Year-on-year growth (RHS)
4 Interconnectedness and Spillover Risks to Banks
Quarterly China Shadow Banking Monitor, February 2018 37
Note: According to PBOC’s definition, large banks include banks with more than RMB2 trillion of assets at the end of 2008; midsize banks include banks with less than RMB2 trillion but
more than RMB300 billion of assets at the end of 2008; small banks include banks with less than RMB300 billion of assets at the end of 2008. Other depository institutions include
foreign banks, rural credit cooperatives and finance companies.
Sources: Moody’s Investors Service and PBOC
» Banks’ net claims on NBFIs remained broadly stable in Q4 2017 after declining in Q3 2017.
» The contrast with the rapid rise of such claims in 2016 suggests that intensified regulation is having
an effect in reducing the interconnectedness between shadow banks and banks (mainly small and
midsize banks).
» The November 2017 draft guidelines on the asset management business aim to reduce still further
the interconnectedness among financial institutions and improve transparency on the underlying
assets.
Tighter regulation reduces interconnected-
ness between banks and non-banks
-4
-2
0
2
4
6
8
10
12
14
R
M
B
tr
illi
on
Net claims on NBFIs by large banks Net claims on NBFIs by midsize banks
Net claims on NBFIs by small banks Net claims on NBFIs by other depository institutions
Total net claims on NBFIs
Quarterly China Shadow Banking Monitor, February 2018 38
Note: Positive numbers indicate lender of funds; negative numbers indicate borrowers of funds. Others include urban credit cooperatives, rural credit cooperatives, finance
companies, trust companies, financial leasing companies, asset management companies, social security fund and fund companies.
Sources: Moody’s Investors Service and PBOC
» Large banks remain net fund suppliers in the interbank market, while small and midsize banks,
securities firms and other financial institutions are net borrowers.
» While small and midsize banks reduced their interbank borrowing in the first three quarters of 2017,
securities firms and other types of financial institutions increased their reliance on wholesale funding.
Their increased reliance on interbank funding may be due to regulations that limit banks’ ability to
engage in regulatory arbitrage, such as by extending financing to corporates using asset
management products issued by NBFIs as pass-through channels, while obscuring the true extent of
exposure to the ultimate borrowers.
NBFIs’ reliance on wholesale funding
rises
-80
-60
-40
-20
-
20
40
60
80
2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3
Q
ua
rte
rly
F
un
d
Fl
ow
s
in
th
e
In
te
rb
an
k
M
ar
ke
t (
R
M
B
tr
illi
on
)
Big banks Small and midsize banks Securities firms Insurers Foreign banks Others
Quarterly China Shadow Banking Monitor, February 2018 39
» Among small and midsize banks major forms of wholesale funding (interbank liabilities, repurchase
agreements and deposits from NBFIs) declined by percentage points in 2017. By contrast, there
was a modest (%) increase in central bank borrowings as a share of total liabilities.
» This shift reflects tighter regulations on banks’ interbank funding practice, as well as the central banks’
increased direct lending to banks.
^ Small and midsize banks include banks with total assets of less than RMB2 trillion (as of year-end 2008 demonstrated in both local and foreign currencies).
Sources: Moody’s Investors Service and PBOC
Small and midsize banks shift away
from wholesale funding
0%
10%
20%
30%
40%
Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
W
ho
le
sa
le
fu
nd
s
as
%
o
f t
ot
al
s
ou
rc
e
of
fu
nd
s
by
s
m
al
l a
nd
m
id
si
ze
b
an
ks
^
Interbank NBFIs Repo Bonds Central bank borrowings
Quarterly China Shadow Banking Monitor, February 2018 40
Note: 6 regional banks with Q3 2017 results include Bank of Beijing, Bank of Ningbo, Bank of Nanjing, Chongqing rural commercial bank, Bank of Chongqing and Bank of Zhengzhou.
Sources: Moody’s Investors Service, financial reports of 15 listed joint-stock and regional banks
» Increased regulatory scrutiny of banks investment receivables, to prevent them from being used to hide
credit exposures to ultimate borrowers, has had a mixed impact.
» Data from listed banks show that investment receivables among joint-stock banks fell in the nine
months to 30 September 2017, while those among regional banks rose. As a result, the share of
investment receivables in total assets fell to % from % for listed joint-stock banks but rose to
% from % for listed regional banks in this period.
Regional banks’ investment receivables
still rising
0%
5%
10%
15%
20%
25%
2014 2015 2016 2017Q3
"In
ve
st
m
en
t r
ec
ei
va
bl
es
"
as
%
o
f t
ot
al
a
ss
et
s
Joint-stock banks (9 banks) Regional banks (6 banks)
Quarterly China Shadow Banking Monitor, February 2018 41
» In Jan 2018, the China Insurance Regulatory Commission (CIRC) announced new rules to prohibit
insurers, in particular their asset management subsidiaries, from conducting channel business (see
slide 53) or multi-layered investments.* The regulators also tightened rules to ban insurers from
turning private equity investment into de facto debt investment, which may increase the contingent
liabilities of local governments.
* See Insurance – China’s new regulations for insurers’ investments are credit positive, February 2018
Sources: Moody’s Investors Service and CIRC
New CIRC rules target asset
management subsidiaries of insurers
0%
20%
40%
60%
80%
100%
2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Nov
A
s
%
o
f I
ns
ur
er
s'
In
ve
st
m
en
t
Bank deposits Bonds Equities and investment funds Other investments
5 The Growth of E-finance
Quarterly China Shadow Banking Monitor, February 2018 43
Note: Customer reserves refer to the funds deposited by customers in payment institutions as well as the funds collected or paid by the same organizations.
* Excludes e-payments through digital red envelopes; ^ Mainly include internet and mobile payment transactions
Sources: Moody’s Investors Service and PBOC
» While the overall share of e-payment transactions processed by non-banks remains small compared to
those made through banks’ electronic platforms, it has increased steadily since 2014. The share has
reached % of total e-payment transactions in the first nine months of 2017.
» In December 2017, PBOC announced that it would gradually increase the deposit reserve ratio on
customer deposits of these payment platforms to 50% by April 2018 from the current 20%, with an
objective to reduce potential fraud or misuse by the platforms. This move suggests that supervision of
e-payment transactions will be further centralized.
Regulators keep tight supervision
of non-bank e-payment transactions
0%
1%
2%
3%
4%
5%
6%
0
20
40
60
80
100
120
2014 2015 2016 2017Q1-Q3
R
M
B
tr
illi
on
Non-bank payment vehicles' e-payment transactions* (LHS) as % of banks' E-payment transactions^ (RHS)
Quarterly China Shadow Banking Monitor, February 2018 44
Note: Data from Aug-2017 to Oct-2017 are estimated based on the report by National Committee of Experts on Internet Financial Security.
Sources: Moody’s Investors Service and National Committee of Experts on Internet Financial Security
» China has gradually tightened supervision on cryptocurrencies since 2017. The government has
officially banned any onshore cryptocurrency fundraising activities, also known as initial coin offerings
(ICOs) and closed major trading platforms in September 2017. In consequence, the transaction
volumes of bitcoin trades paired with RMB has plunged.
» The clampdown indicates authorities’ concerns about illegal fundraising and money laundering using
cryptocurrencies, in line with the broad efforts to reduce financial risks.
» In January 2018, the National Internet Finance Association of China (NIFA) has highlighted that some
domestic investors had begun to participate in ICOs and cryptocurrency trading activities through
offshore platforms. This raised expectations of further tightening measures going forward.
Heightened regulatory scrutiny on crypto-
currency fundraising and trading activities
0
10
20
30
40
50
60
Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17
V
ol
um
e
of
B
itc
oi
n
Tr
an
sa
ct
io
ns
in
C
hi
na
R
M
B
b
illi
on
Quarterly China Shadow Banking Monitor, February 2018 45
^ See Banks: China’s regulation of internet-based consumer finance is credit positive for banks, December 2017
* ”Troubled” refers to platforms that have encountered liquidity or insolvency problems, and are under investigation and/or have been shut down/exited
Sources: Moody’s Investors Service and Wangdaizhijia
» The outstanding balance of credit extended via peer-to-peer (P2P) lending in China increased to
trillion at the end of 2017 compared to trillion a year ago. However, the number of
operating platforms has declined for the second year in a row, by % in 2017.
» In December 2017, the PBOC and CBRC issued a broad set of regulations to restrict internet-based
platform companies from conducting a number of activities. They can no longer make loans to finance
down payments of housing purchases and loans for purchases of stocks and futures, nor can they
channel bank funds to extend P2P loans.^ The new rules also put a temporary ban on these
platforms on general-purpose unsecured consumer loans. Risks from internet finance activities will be
one of the key financial vulnerabilities the newly established Financial Stability and Development
Committee focuses on.
Peer-to-peer lending faces tighter
scrutiny
0
200
400
600
800
1000
1200
1400
0
1000
2000
3000
4000
5000
6000
2011 2012 2013 2014 2015 2016 2017
R
M
B
b
illi
on
U
ni
ts
Operating P2P platforms (LHS) "Troubled" P2P platforms* (LHS) Outstanding P2P loans (RHS)
Quarterly China Shadow Banking Monitor, February 2018 46
» Growth in Yu’e Bao’s AUM decelerated to % quarter-on-quarter in Q4 2017, compared to % in
Q3 and % in Q2. Its AUM reached a new peak of trillion on 31 December 2017.
» However, Yu’e Bao’s share of the broad Money Market Mutual Fund (MMF) industry declined to 22%
at the end of 2017 compared to a peak level at 27% at the end of March 2017 as its growth was
outpaced by the broader MMF industry.
» Reflecting tighter market liquidity, the seven-day annualized yield offered by Yu’e Bao rebounded to
% at the end of 2017.
Yu’e Bao still dominates China’s MMF
industry, although its momentum is slowing
Sources: Moody’s Investors Service, Wind
0
2
4
6
8
0
200
400
600
800
1000
1200
1400
1600
1800
%
R
M
B
b
illi
on
Size of Yu'e Bao (LHS) Yu'e Bao 7-day annualized return (RHS) 1-Year benchmark deposit rate (RHS)
Quarterly China Shadow Banking Monitor, February 2018 47
Yu’e Bao’s assets shift away from bank
deposits
» In Q4 2017 Yu’e Bao shifted its asset allocation away from bank deposits towards financial assets
held under repo agreements. Bank deposits as a share of total assets decreased sharply to a record
low of around 57% at the end of 2017, from 87% at 31 September 2017.
» In line with the priority attached to liquidity risk management in the latest CSRC rules on the MMF
industry, effective since October 2017, the weighted average maturity of its assets fell to 41 days at
the end of 2017, compared with 60 days at the end of Q3 2017.
Sources: Moody’s Investors Service, Wind
30
40
50
60
70
80
90
100
110
120
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
D
ay
s
A
s
%
o
f T
ot
al
Y
u'
e
B
ao
A
ss
et
s
Bank deposits Interbank NCDs Policy bank bonds
Treasury bonds Commercial paper Financial assets held under repo agreements
Others Weighted average maturity (RHS)
6 Regulatory Updates & Market Events
Quarterly China Shadow Banking Monitor, February 2018 49
Source: Moody’s Investors Service
DATE KEY REGULATORY DEVELOPMENTS
April 2017 China Securities Depository and Clearing Corporation Limited (CSDC) announces a plan to tighten requirements for using corporate bonds as
collateral. CBRC issues eight guidelines/opinions and vows to improve regulatory effectiveness and enhance risk control for the banking industry. Key
financial risks have been addressed, including the outsourcing of bond investments; interbank operations involving multiple layers of credit
transactions; the WMP business; risks related to the property sector, local government financing vehicles and internet finance ;and contingent risks
from the private lending market to formal banking system. Banks are required to conduct self-inspections on compliance with laws and regulations,
and regulatory arbitrage/improper operations. CBRC investigates cross-guarantees for bank loans and identifies risky corporate borrowers.
May 2017 Banking Wealth Management Product Registration & Depository Center tightens disclosure rules for banks’ WMP asset composition and structure.
June 2017 PBOC, with other 16 Chinese government ministries and commissions, extend the expected completion day for the rectification on e-finance to June
2018.
July 2017 Authorities deliver their refreshed commitment to remaining vigilant to financial risks and facilitate reforms to curb leverage after the National Financial
Work Conference. A new committee under the State Council will be established to better supervise financial stability and development.
Aug 2017 PBOC decides to include NCDs with maturities of less than one year when calculating compliance with the wholesale funding cap of one third
of bank’s total liabilities from Q1 2018. CBRC requires all trust companies to register their products with government-backed China Trust
Registration Co. by end-November 2017. The CSRC releases new rules to improve the liquidity risk management in the MMF industry,
focusing on potential concentration risks to the MMFs posed by large investors and their exposures to issuers with lower domestic credit
ratings.
Oct 2017 President Xi Jinping’s speech at the 19th National Congress highlights the importance of establishing a dual-pillar financial policy framework and
reiterates the on-going regulatory policy priority of safeguarding the financial stability.
Nov 2017 China’s regulatory authorities, including PBoC, CBRC, CSRC, CIRC and SAFE, jointly publish for comment a set of draft guidelines to regulate
financial institutions’ asset management business. The guidelines establish a comprehensive regulatory framework covering all asset management
products originated by banks, trust companies, securities companies, mutual fund management companies, insurance companies and futures
companies, which will further reduce the scope for regulatory arbitrage in the financial industry.
Dec 2017 CBRC publishes for public comment a draft revision of commercial banks’ liquidity risk regulation, which will discourage the shadow-banking
practice of using short-term market funding for longer-maturity investment in structured products. CBRC tightens regulatory scrutiny on the
channel business via bank-trust cooperation arrangements, which will further reduce the scope for regulatory arbitrage. PBOC and CBRC
issue new rule to rectify excesses in internet-based consumer finance.
Jan 2018 CBRC launches tighter rules regulate banks' entrusted loans business. The funding sources for entrusted loans are under tighter regulatory scrutiny,
and investments in bonds, derivatives and broad asset management products are strictly prohibited. PBoC, CBRC, CSRC and CIRC jointly release
new rules to regulate bond trading and further facilitate deleveraging in the financial industry. The coordinated initiatives restrict leverage of bond
repos and reverse repos by financial institutions, with a focus on the crackdown on ''pledged financing' activities without formal agreements. CBRC
releases a statement to maintain tight supervision on shadow banking activities with stricter inspections in 2018, with a focus on wealth management
products, interbank and off-balance sheet business along with multiple layers of transactions. CBRC publishes for public comment a draft regulation of
commercial banks’ large exposure management in accordance with the Basel Committee on Banking Supervision’s framework. Asset Management
Association of China (AMAC) issues a statement to prohibit private offered funds from extending shadow credit through funding entrusted loans, trust
loans, micro loans and private loans etc.
Regulatory measures to curtail shadow banking risks
Quarterly China Shadow Banking Monitor, February 2018 50
CBRC announces it imposed penalties of
RMB190 million in 485 cases of law and
regulation violations, accounting for 70%
of total fines collected in 2016.
A sub-branch of China Minsheng Banking
Co., Ltd. in Beijing has been involved in
sales of unauthorized wealth
management products to private banking
clients.
CBRC tells trust companies to check risks
from exposure to real estate and
overcapacity sectors through self-
inspections.
Timeline of recent market and policy events
CBRC confiscates illegal income and imposes
a record-high penalties (RMB722 million) on
China Guangfa Bank Co., Ltd. for providing
illegal guarantees for the defaulted private
placement bond issued by Cosun Group.
In the last nine months starting from the end of
March 2017, CBRC investigates about 59,700
instances of illegal or improper behaviors,
affecting total assets of nearly
trillion.
PBOC allows qualified banks to temporarily
withdraw up to 2% of the deposit reserves for
up to 30 days, in pursuit of smoothing liquidity
conditions during the Chinese New Year.
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18
A CBRC official says that financial
regulations will become more stringent
going forward and confirms that
interbank leverage, wealth
management business and off-balance
sheet activities remain the key policy
focus throughout 2017.
CBRC warns rising consumer loans
with potential risks could result in an
excessive increase of household
leverage and fuel property bubbles.
CBRC also launches an investigation
into potential misuse of consumer loans
for home purchase at the local level.
Source: Moody’s Investors Service
Liu He, an economic adviser to
China’s top leadership, speaks
at 2018 World Economic Forum
in Davos that curtailing financial
risks remains a top priority for
the government in 2018. China
will continue to tackle risks from
shadow banking sector and local
government contingent liabilities.
Over the next three years, the
government will seek to control
the economy-wide leverage and
prevent any systemic risks.
The default of
Sealand Securities on
one bond transaction
raises concerns on
potential counterparty
risks among market
participants, fueling
market volatility.
PBOC raises the
interest rates
charged on reverse
repo operations and
non-traditional
targeted liquidity
instruments including
the SLF and MLF.
In the latest Financial Stability
Report, PBOC vows to closely
monitor risks from the shadow
banking sector, broad asset
management business and
internet finance activities including
P2P lending.
CIRC releases guidelines to
regulate and restrict the credit and
guarantee insurance business of
property and casualty (P&C)
insurers.
CBRC decides to give banks a grace
period of four to six months for
compliance with the new policy
guidelines.
CSRC highlights that securities firms
should not conduct the “pass-through”
channel business without playing an
active management role.
The government publishes Document
50, which reinforces the existing
prohibition, under China’s budget law
and previously published policy
guidelines, on RLGs borrowing via
LGFVs and providing guarantees.
PBOC prohibits the issuance of
inter-bank NCDs with tenors
exceeding one year from
September 2017.
PBOC Governor Zhou says the
newly established Financial
Stability and Development
Committee will focus on risks of
financial vulnerabilities related to
(1) the shadow banking sector,
(2) broad asset management
industry, (3) e-finance activities,
and (4) illegal operations by
financial holding companies in
the private sector.
Appendix: Glossary,
Notes on Estimates,
& Data Sources
Quarterly China Shadow Banking Monitor, February 2018 52
» Broad shadow banking activity – our definition consists of core shadow banking activity, plus
assets funded by WMPs, loans by finance companies, informal lending, and others (see slide 21).
» Channel business – commonly refers to third-party financial institutions that do not actively manage
the investments but solely provide investment channels to the ultimate investors, who leverage the
channel business to move a block of business off balance sheet to escape regulations. Channel
business is a major form of shadow banking in China.
» Core shadow banking activity – our definition consists of the following components of TSF:
entrusted loans, trust loans, and undiscounted bankers’ acceptances (see slide 21).
» Directional asset management plan – a DAMP consists of an agreement between a bank and a
securities firm whereby the former provides liquidity and directs the investment decisions while the
latter passively channels funds, often to a designated borrower. The securities firm receives
commissions fees for undertaking the transactions, and the bank bears ultimate credit risk.
» Entrusted loans – loans between companies with banks or other finance institutions (trust
companies, finance companies etc.) acting as agents to the transaction. Borrowers and lenders are
familiar with each other. Entrusted loans are treated as off-balance sheet items to banks with very
limited underlying credit risks.
» M1 – narrow money, consisting of M0 (currency in circulation), corporate demand deposits, deposits
of government departments & organizations, rural deposits, and credit card deposits.
» M2 – broad money, consisting of M1, corporate time deposits, household savings deposits, securities
firms customer margin deposits, deposits of the Housing Provident Fund Management Center and
deposits of non-depositary financial institutions in depository financial institutions.
Glossary
Quarterly China Shadow Banking Monitor, February 2018 53
» Non-standard debt assets – a term defined by the CBRC as a debt instrument that is not traded in
the interbank bond market or stock exchange. As such, it includes instruments such as trust loans,
various types of beneficiary rights, bankers’ acceptance, letters of credit, accounts receivables and
equity financing under repurchase agreements.
» Total Social Financing – TSF is an official measure of the PBOC to capture a comprehensive
measure of credit supplied by the entire financial system in China. The major components include
formal bank loans, trust loans, entrusted loans, undiscounted bankers’ acceptances, direct financing
(bond and equity issuance) and others (such as microcredit and pawn shops).
» Trust beneficiary rights – TBRs refer to rights granted to the owner of an asset that is held in trust,
including returns accruing to the trust.
» Trust loans – loans made by Chinese trust companies and often funded through structuring these
loans into WMPs with banks acting as distribution channels. Trust loans tend to have elevated levels
of credit risks given the underlying borrowers are often from industries more prone to cash flow
volatility (property, mining sectors etc.) and can’t get loans from banks.
» Undiscounted bankers’ acceptances – BAs are short-term debt instruments issued by a company
with trade credit guaranteed by a bank. These instruments are not always associated with corporate
leverage and are treated as off-balance sheet items to banks.
» Wealth management products – WMPs are usually sold to retail investors through bank retail
channels with higher yields than formal bank deposit rates. WMPs are backed by credit instruments
including bonds, interbank placements, bank loans and trust loans, carrying the same credit risks as
the underlying assets in which they invest. Banks’ off-balance sheet WMPs are not principal
protected. Securities companies also issue WMPs, mainly through “asset management” or
“directional” plans for institutional investors, consisting of assets originated by banks.
Glossary (cont’d)
Quarterly China Shadow Banking Monitor, February 2018 54
» Slide 7, 8, 9 and 10 – Growth of historical outstanding shadow banking components is estimated by
Moody’s based on data provided by the People’s Bank of China (PBOC)
» Slide 11, 19 and 37 – Data from the PBOC
» Slide 25, 26, 27, 28 and 29 – Data from China Banking Wealth Management Product Registration &
Depository Center
» Slide 30 – Data of WMPs new issuance are collected from Wind Information.
» Slide 33, 34 and 35 – Data from China Trustee Association
» Slide 38 and 39 – Data from the PBOC
» Slide 40 – Data are collected from company financial statements
» Slide 41 – Data from China Insurance Regulatory Commission
» Slide 45 – Data are collected from Wind Information and Wangdaizhijia
Data sources
Quarterly China Shadow Banking Monitor, February 2018 55
» Slide 21 – Sources of Estimates for Components of Shadow Banking
– Entrusted loans: data provided by the PBOC
– Trust loans: data from the China Trustee Association
– Undiscounted bankers’ acceptances: data provided by the PBOC
– Off-balance sheet bank WMPs: Moody’s estimates based on data from China Banking Wealth
Management Product Registration & Depository Center. Underlying entrusted and trust loans are
deducted to eliminate double counting.
– WMPs by securities firms and funds: Moody’s estimates based on data from the Asset
Management Association of China. Underlying entrusted and trust loans are deducted to eliminate
double counting.
– Loans by finance companies: data from Wind Information
– Informal lending: Assuming an unchanged balance from end-2011, sourced from a survey by the
PBOC in May 2011 of 6615 corporate borrowers.
– Loans by microcredit companies: 2017 data from PBOC
– Pawn shop loans: data provided by the Ministry of Commerce
– Financial leasing: data provided by the China Leasing Alliance
– Credit guaranteed by financial guarantee companies: Moody’s estimates based on end-2014
data collected from Wind Information and China Financing Guarantee Association
Data sources (Cont’d)
Quarterly China Shadow Banking Monitor, February 2018 56
» Adjustment of TSF (slide 7) was made to correct a distortion arising from the local government
debt swap program due to the exclusion from, and hence reduction in, outstanding TSF. The
resulting adjustment is a slightly higher level and growth rate of outstanding TSF.
» Shadow banking components for 2016 (slides 6 and 21) have been updated based on available
data as described in slide 55, with estimates made for credit guaranteed by financial guarantee
companies. The estimates are subject to a revision as final data are released from official sources in
the coming months.
» Calculation of “Assets funded by WMPs” (slide 21):
– Consists of two parts: WMPs structured or distributed by banks off-balance sheet, and non-standard debt assets
under asset management plans issued by securities firms, fund companies and fund subsidiaries. To eliminate double
counting, from the former, we deduct outstanding “trust-bank cooperation products” provided by the China Trustee
Association and entrusted and trust loans as disclosed by China Banking Wealth Management Product Registration &
Depository Center; from the latter we deduct entrusted and trust loans as disclosed by the Asset Management
Association of China.
– While we have made best efforts to eliminate double-counting, it is not possible to eliminate it entirely given the
limitations of the data currently available. Nevertheless, we believe that we have been able to reduce it to a level
where the impact on our findings is relatively modest.
» Estimate of shadow banking not captured in TSF: We subtract from “non-core” shadow banking
assets funded by WMPs that are indirectly captured in TSF (for the relevant components see China
Banking Wealth Management Product Registration & Depository Center and Asset Management
Association of China), and other components in TSF (loans of finance companies, financial leasing,
microcredit, pawn shops, and consumer credit companies) as described in slide 55.
Notes on estimates and calculations
Quarterly China Shadow Banking Monitor, February 2018 57
» Lack of transparency remains an issue, hindering credit assessments of shadow banking
activities. Authorities have gradually improved the dissemination of data and disclosure rules on
shadow banking in the past few years, which underpinned our analysis and has allowed us to form
what we believe is a reasonably accurate picture of China’s rapidly evolving shadow banking sector.
However, despite these positive developments in data availability, there remains a number of
significant gaps in the data that limits our ability to assess a number of trends in the sector.
– For example, there has been a lack of disclosure of the industry exposures from banks’ WMP
investments as well as the asset composition of NSDAs. Such information had been previously
available in the official WMP reports but has been excluded since the full year report for 2016.
Owing to multiple layers of credit transactions, as well as poor data disclosure, we are unable to
assess the extent to which these WMP instruments have high single-industry or borrower
exposures that expose them to idiosyncratic risks.
– A second example is limited disclosure on asset composition and asset quality of banks’
investments in loans and receivables. The use of “pass-through” channels and credit
enhancement obscures the true extent of the banks' exposure to the ultimate borrowers, while the
lower provisioning and capital requirements lower their resilience to potential credit shocks.
– Tighter disclosure requirements as a supplement to the recent coordinated regulatory actions
would greatly enhance the transparency of these shadow banking assets and transactions that
involve complex structures among banks and NBFIs.
Notes on estimates and calculations
(Cont’d)
Quarterly China Shadow Banking Monitor, February 2018 58
» Special Comment
– China’s New Guidelines on Asset Management Products Are Credit Positive, November 2017
– Increasing Reliance on Wholesale Funds Makes Midsize and Small Chinese Banks More Vulnerable to Confidence
Shocks, August 2016
– Chinese City Commercial Banks Will Face Asset Quality and Capital Pressures in 2016, December 2015
» Sector Comment
– Banks: China’s Tighter Regulation on Banks’ Entrusted Loans Is Credit Positive, January 2018
– Banks: China’s Regulation on Banks’ Liquidity Will Help Curtail Shadow-Banking, December 2017
– Banks: China’s Regulation of Internet-Based Consumer Finance Is Credit Positive for Banks, December 2017
– Banks – China: PBOC’s Increasing Use of Medium-Term Facilities Is Credit Positive for Banks, November 2017
– China’s Plan to Tighten Regulation of Negotiable Certificates of Deposit Is Credit Positive for Banks, August 2017
– Banks – China: Measures to Curb Shadow Banking Benefit Banks But Also Bring Adjustment Risks, July 2017
– Banks – China: Wealth Management Product Issuance Moderates Amid Regulatory Scrutiny, June 2017
– Mid- and Small-Sized Banks' Higher NCD Levels Pressure Profitability, Widen Funding Mismatches, March 2017
– Chinese Proposal to Regulate Banks’ Wealth-Management Products Is Credit Positive, August 2016
– Investments in Loans and Receivables Increase System Risks, June 2016
– Comparing Shadow Banking in the West and China, June 2015
» Banking System Outlook
– China, July 2017
» Banking System Profile
– China, January 2017
Related research
Michael Taylor
Managing Director – CCO APAC
Credit Strategy and Standards
+
@
Lillian Li
Vice President
Credit Strategy and Standards
+
@
George Xu
Analyst
Credit Strategy and Standards
+
@
Charlene Wang
Associate Analyst
Credit Strategy and Standards
+
@
Quarterly China Shadow Banking Monitor, February 2018 61
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Quarterly China Shadow�Banking Monitor
Quarterly China Shadow Banking Monitor
1
Key Messages
2
Slide Number 6
Slowdown broadens to “core” products
Slide Number 8
Slide Number 9
But the rotation back to the banks�has its limits
Slide Number 11
Corporate bond issuance slips on rising spreads
Cases of cancellation or delay of bond issuance are on the rise
Property developers, LGFVs turn to offshore bond market
2a
Slide Number 16
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PBOC’s direct lending to banks continues to expand
3
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3a
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3b
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4
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5
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Yu’e Bao’s assets shift away from bank deposits
6
Slide Number 49
Timeline of recent market and policy events
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