Informal lending by Chinese banks, so-called shadow banking, is back in vogue after two and half years of regulatory clampdown as Beijing pledges faster credit growth to rescue its coronavirus-hit economy, according to a new report.
Overall shadow banking assets in China rose for the first time since 2017, a report published by American business and financial services company Moody’s on Wednesday showed.
The report detailed how shadow banking assets in the world’s second largest economy grew 100 billion yuan (US$14 billion) to 59.1 trillion yuan (US$8.4 trillion) in the first quarter of 2020, compared with a 1.2 trillion yuan decline to 60.2 trillion yuan during the same period in 2019.
This rise suggests that Beijing, which had been tightening its control over off-balance sheet lending by banks since 2016 to curb financial risks, has switched its focus to supporting economic recovery by slowly allowing shadow credit to expand again, according to the rating agency.
“Increased policy focus to support economic recovery will fuel further expansion of shadow credit. However, a rapid rebound is unlikely as financial systemic stability still remains one of the authorities’ main policy objectives,” Moody’s said.

Shadow banking had previously increased rapidly in China, mainly driven by the need for borrowing among small and medium-sized companies in the private sector which are unable to obtain loans from banks, which often prefer to lend to state firms and larger listed private companies.
Wealth management products, which are essentially off-balance-sheet substitutes for deposits without the regulatory interest rate ceilings offered by banks to savers, were a big driver to the growth of shadow credit in the first quarter, Moody’s said.
Issuance of wealth management products with investment terms of three months or less rebounded to 43 per cent of the total volume in the first three months of 2020, the highest increase since the second quarter of 2018.
Wealth management products constitute the largest shadow banking segment in China and are often invested in a range of loans and securities that have high exposure to speculative areas such as real estate and stocks or funding weaker borrowers.
The central government has sought to balance the need to curb the growth of shadow banking as default risks rise in wealth management products and trust products, while leaving some room for the private sector to access credit, but Moody’s expects asset quality to continue to deteriorate this year in the trust sector.
Trust companies do not face the same government-imposed lending quotas as state banks, giving them more flexibility to hand out loans or pick investment choices.