China's shadow banking assets grew for the first time in 2.5 years

It makes up 60.3% of nominal GDP as of Q1.

China’s broad shadow banking assets as a share of nominal GDP increased to 60.3% in Q1 from 59.5% at end-2019, according to a report by Moody’s Investors Service. This is the first time in 2.5 years that broad shadow credit increased.

This was attributed in part to the economic contraction resulting from the coronavirus outbreak.

Economy-wide leverage—or using borrowed money or borrowed capital to increase the potential return of an investment—also sharply rose in Q1, and is expected to continue to increase.

"We expect leverage will continue to rise for some months as monetary and credit policies are eased to support China's economic recovery, although the overall increase will be limited as the government remains focused on financial stability," says Michael Taylor, Moody's managing director and chief credit officer for Asia Pacific.

"At the same time, increased infrastructure lending has arrested the previous decline in trust loans, whilst trust lending to local government financing vehicles (LGFVs) also rebounded in the first quarter to reflect policy support for LGFV-led infrastructure projects," adds Lillian Li, Moody's vice president and senior credit officer.

Meanwhile, banks and non-bank financial institutions (NBFIs) showcased improved interconnectedness for the first time in a year, as the easier monetary policy environment has incentivised small banks to improve loan yields by funding NBFIs, the report noted.

In the meantime, investors in China showed rising preference for liquid assets such as money market funds (MMFs) and short-tenor wealth management products amidst uncertainty from the pandemic. Assets under management at MMFs grew in Q1 after a year of contraction, said Moody’s.

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