Quarterly China ShadowBanking MonitorNOVEMBER, 2017 Quarterly China Shadow Banking Monitor, November 20172Quarterly China Shadow Banking Monitor1. Key Messages2. Credit Conditions(a) Liquidity Conditions3. Composition and Trends of Shadow Banking(a) Wealth Management Products(b) Trust Sector4. Interconnectedness and Spillover Risks to Banks5. The Growth of e-finance6. Regulatory Updates & Market EventsAppendix: Glossary, Notes on Estimates & Data Sources 1Key Messages Quarterly China Shadow Banking Monitor, November 20174Key Messages»Amid the on-going regulatory clampdown, the growth of broadly defined shadow banking came to a halt in the first half of 2017. Total shadow banking assets barely grew during the first six months of 2017 and declined as a percentage of GDP for the first time since 2012.»The slowdown was driven by a decline in issuance of higher risk instruments, such as wealth management products (WMPs) issued by banks and asset management plans channeled through non-bank financial institutions (NBFIs) regulated by China Securities Regulatory Commission (CSRC). The share of WMPs held by interbank investors has begun to shrink, and banks’ claims on NBFIs are also declining, indicating that recent measures are having some effects in reducing financial system interconnectedness and addressing financial system vulnerabilities created by increasingly complex and opaque funding chains.This suggests regulatory measures may be having some success in spurring deleveraging in the financial sector.»However, credit demand from the real economy remains strong and is being met by a continued expansion of core shadow banking, in addition to by bank lending and corporate bond issuance. “Core” shadow banking, the components of which are included in total social financing (TSF), continued to show signs of strong growth, with both trust and entrusted loans growing and with undiscounted bankers’ acceptances expanding for the first time in three years. Bank lending also remains strong, particularly with growth in the household sector picking up. Corporate bond issuance also ticked up in the third quarter.»The People's Bank of China (PBOC) is facilitating the de-risking of the financial sector by expanding its liquidity provision. Despite rising yields, new issuance of interbank negotiable certificates of deposit (NCDs) reached a record high in September, which suggests some small and midsize banks face rollover pressure. As market liquidity tightens due to the PBOC’s “moderate and neutral” monetary policy stance and banks’ reduced ability to obtain finance through shadow banking channels, the PBOC has increased its liquidity supply through long-term repo operations to give banks more time to wind down their investment portfolios. Small and midsize banks, in particular, are lessening their reliance on wholesale funding and relying increasingly on central bank funding.»Challenges associated with regulatory tightening and broad deleveraging campaign remain. Following the 19thNational Congress of the Communist Party of China, financial-sector regulation will likely continue to restrain the growth of shadow banking activities and address some key imbalances in the financial system. However, the authorities continue to face challenges in preventing the de-risking of the financial sector from causing systemic disruption. Adding to the challenges, someshadow banking products are not transparent, and regulatory measures tend to end up encouraging financial innovations for evading tighter regulations. Moreover, the ability of the formal system to replace shadow credit is limited, and bank credit may not be a perfect substitute for shadow credit. Finally, household sector leverage continues to expand, which has caught regulators’ attention. 2Credit Conditions Quarterly China Shadow Banking Monitor, November 20176»Broad shadow banking assets, as defined in Slide 19, barely grew in the first six months, reaching RMB64.7 trillion compared with RMB64.4 trillion at end-2016.»For the first time since 2012, nominal GDP grew faster than shadow banking assets, resulting in shadow banking falling to 82.6% of GDP as of June 2017 compared to a peak of 86.5% in 2016 at end-2016. »The slowdown was mainly due to a decline in the balance of banks’ WMPs and NBFIs’ asset management plans, parts of shadow credit that are not captured in TSF but have been the focus of recent regulatory measures. Sources: Moody’s Investors Service, National Bureau of Statistics and PBOCGrowth in broad shadow banking stalled in H1 20170204060801000501001502002502011201220132014201520161H2017%RMB trillionShadow bankingBank loansTotal bank assets (including bank loans)Shadow banking as % of GDP (RHS) Quarterly China Shadow Banking Monitor, November 20177But decline in WMPs was partially offset by strong growth of “core” shadow banking »Tighter regulatory scrutiny of shadow banking components not captured in TSF has resulted in declines in their high growth rates