China using tools to minimize damage from shrinking shadow-banking sector
China's shadow-banking sector has shrunk in response to the regulatory clampdown launched in early 2017, which could address certain risks to the financial system if it continues over the medium term, says Fitch Ratings.
The decline in shadow-banking activity could create potential liquidity shortages, but the recently announced targeted cut to the required reserve ratio (RRR) illustrates that the authorities will use policy tools to guard against a significant impact on prioritised sectors.
System-wide interbank assets had fallen by 13.8 per cent year-over-year as of the end of August 2017, while interbank liabilities were down by 1.6 per cent, according to data from the China Banking Regulatory Commission (CBRC). This was the first drop in both interbank assets and liabilities since 2010.
The decline was sharpest among joint-stock commercial banks, which had been more aggressive in interbank activities. Their interbank assets were down by 45 per cent at end-August 2017 from the start of the year. Entrusted loans fell for the first time since 2008 over the same period.
Meanwhile, growth in wealth management products (WMPs) continued to slow, with the interbank WMP balance falling by 2.2 trillion Chinese yuan (Bt11.1 trillion) from January to August 2017. Fitch estimates the outstanding WMP balance has declined by around 10 per cent so far in 2017.
