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In view of Elliot Clarke, Research Analyst at Westpac, the greater risk to the region is likely that emanating from China’s domestic banking system as it undergoes lasting change to rein-in shadow banking activity and shift the majority of credit supply to the banks.

Key Quotes

“Chinese credit data is now available to July. In the most recent release, a further fall in shadow banking credit was seen such that credit provided by these shadow lenders has now only increased by about RMB700bn in 2018 compared to almost RMB3.5trn at this time in 2017.”

“Greater lending by the banking system has only offset around RMB900bn of the reduction in new shadow credit in 2018, so total credit growth in 2018 is almost RMB2trn less than the prior year.”

“This outcome is intended and well managed, but whenever a policy shift of this magnitude is undertaken, there are risks which must be monitored. It is not happenstance that Chinese regulators have recently acted to ease financial conditions and bolster market liquidity.”

“In these uncertain times, a clear positive for China’s economy is their  housing market.”

“As we look ahead to next week, US/China trade relations will again fill the headlines, given a Chinese trade delegation is reportedly heading to the US for talks just before the US’ next round of tariffs are to take effect.”