S&P: Chinese banks may still have 3 trillion “shadow” assets by the end of the year

S&P Global Ratings reported on April 26 that Chinese banks may still maintain $3 trillion in “shadow” assets by the end of 2021.

According to the S&P report, “Some Chinese banks may not be able to complete the cleanup or crystallization of ‘shadow’ wealth management product assets by the end of this year, as a rush to meet deadlines could hit banks’ capital levels and trigger industry caps on lending.”

In 2020, when China’s financial system was hit by the outbreak of the Chinese Communist virus (Wuhan pneumonia), the government extended the transition period for banks to clean up or crystallize some of their stock of loan-based wealth management products. Such wealth management products are usually off-balance sheet assets. The extension of the transition period gives banks until the end of 2021 to complete the disposal of their stock of wealth management product assets – but banks appear to need more time.

S&P Global Ratings analyst Xie Manqi said, “The regulatory authorities may give some leeway to banks with weaker capital positions to complete the task on time, as the disposal of shadow assets will largely affect banks’ capital levels, although we believe that most of the stock of wealth management products will be cleared in 2021-2022. “

However, according to the S&P report, it is estimated that banks will still have RMB 2.5-3.5 trillion in non-net worth wealth management products by the end of the transition period at the end of 2021. If these assets are returned to the table, small and medium-sized banks will take up a larger amount of capital.

Xie Manqi said, “Banks will use the extended transition period to gradually come to complete the disposal of the surviving wealth management products to prevent a huge impact on capital costs and provisions after these assets are returned to the table, and we expect 60%-70% of the stock of non-net-worth wealth management products (RMB 5 trillion to RMB 5.9 trillion) to be suppressed by the end of 2021.”

According to a report released by international rating agency Moody’s in early January 2021, China’s broad shadow banking assets grew by around RMB 700 billion to RMB 59.7 trillion in the first three quarters of 2020.

As a core component of shadow banking, the growth of assets docked by wealth management and asset management products reached RMB 1.1 trillion, and the growth of undiscounted bank acceptance bills reached RMB 600 billion, thus driving the overall growth of shadow banking assets.