Financial sector continues curbing risk

China's efforts to limit risks in the financial sector gathered pace in the first quarter, with major progress made in improvements of asset quality and slowing down risky shadow banking, analysts at Moody's Investors Service said on Thursday.

"In particular, we are noticing slowing asset growth and stabilizing asset quality, as well as accelerating loan growth as banks are returning to conventional lending and away from shadow banking activities," said Nicholas Zhu, a vice-president and senior analyst at Moody's.

"Looking ahead, we expect the regulators will maintain a cautious approach in order to alleviate any potential disruption to the real economy from the clampdown on shadow banking and interbank activities," said Zhu.

Asset quality in the financial sector has been stabilized in line with the sustained expansion of the economy according to Moody's, citing data of improved non-performing loans.

Nevertheless, China's ongoing deleveraging could raise default risk somewhat for weaker borrowers in the next 12 to 18 months, according to the rating agency.

Chinese regulators have been tightening the screws regulating the $15 trillion shadow banking sector as part of broader efforts to fend off financial risk, heightening pressure to cash-strapped borrowers as repayment season approaches in the coming months.