China Financing Slowdown Reduces Systemic Risk, Moody’s Says

January 23, 2012, 6:19 AM EST
By Bloomberg News
(Adds comments from report starting in third paragraph.)
Jan. 23 (Bloomberg) — China’s slowing non-bank financing growth will help the economy achieve a “soft landing” and reduces concerns about systemic risk, Moody’s Investors Service said in its Weekly Credit Outlook.
Preliminary data released last week from China’s central bank on financing in 2011 suggests an estimated drop in non-bank funding growth to 25 percent from 45 percent the previous year, Moody’s said. That is a credit positive for banks, the ratings company said.
“China’s ability to slow non-bank financing growth to its current pace is helpful to the prospects of a ‘soft landing’ in the economy and a development that diminishes our concerns about systemic risk,” Yvonne Zhang, a Beijing-based vice president and senior analyst for Moody’s, wrote in the report.
Chinese investors and borrowers have increasingly turned to non-bank products such as trusts, with investors seeking higher returns than bank deposits offer and borrowers looking for financing as China’s government slowed down new lending growth beginning in 2010. Ratings companies, including Moody’s and Fitch Ratings Ltd., said the rise in non-bank lending created added risks to the financial system in part because trusts often invest in assets tied to the real estate market or buy loans that banks want to move off of their balance sheets.
“Although these products are not on banks’ balance sheets, banks play an important role in making the transactions happen,” Zhang wrote.
Slowing Growth
Growth in China is slowing as the government seeks to curb inflation and rising home prices and refocus the engine of economic growth away from investment toward consumption. Gross domestic product expanded by 8.9 percent in the fourth quarter of 2011 from a year earlier, the slowest pace in more than two years. Foreign direct investment fell for the second straight month in December, with November’s decline the first since 2009.
Moody’s Zhang said at a Beijing conference in November that off-balance sheet risks at Chinese banks were rising fast and that the country’s lenders needed better management of credit and liquidity.
China’s aggregate financing, which includes bank lending, off balance-sheet loans and bond and stock sales, fell 1.11 trillion yuan ($175.1 billion) to 12.83 trillion yuan in 2011 from the previous year, the People’s Bank of China said in a Jan. 18 statement.
–Editors: John Brinsley, Patrick Harrington
To contact the reporters on this story: Benjamin Purvis in Sydney at bpurvis@bloomberg.net; Michael Forsythe in Beijing at mforsythe@bloomberg.net
To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net
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