Moody's: Chinese government support for banks remains strong, but will become more selective

Moody's Investors Service says in a new report that recent measures by the Chinese government (A1 stable) for a number of troubled banks indicate that financial system stability remains the overriding priority, although support will become increasingly differentiated.

"We have in recent months seen rapid government response to episodes of bank stress, as regulators aim to alleviate market fear of contagion risk amid ongoing shadow banking and interbank activity," says Nicholas Zhu, a Moody's Vice President and Senior Credit Officer.

Moody's report forms part of an ongoing series of research that provides in-depth analysis on China's contingent liabilities, and the risks posed to financial stability.

"We expect the regulators will continue to reduce shadow banking and interbank activity as part of the policy goal of maintaining financial system stability. As a result, we expect authorities will become increasingly selective in providing support, especially where banks do not pose significant systemic risk," adds Zhu.

Moody's differentiated approach to assessing government support for banks in China takes into account that the probability of government support will likely become more tiered, and assumes lower levels of government support for small regional banks.