Growth of shadow banking assets in China is expected to remain constrained in 2018 as regulators focus on de-risking the country's financial sector, Moody's Investors Service said in a report.

Intensified regulation has managed to restrain growth in off-balance-sheet wealth management products and products originated by non-bank financial institutions, the fastest-growing shadow banking categories in 2015-2016. The remaining shadow-credit drivers in 2017, trust loans and entrusted loans, are also under regulatory scrutiny, Moody's added.

Chinese banks have not been able to fully replace the reduced supply from shadow credit, as their own capital and liquidity constraints and underwriting processes are stricter than those of the shadow banking sector, according to George Xu, an analyst at Moody's.

"As a result, many marginal borrowers with weaker credit profiles and higher reliance on shadow finance will continue to face tight credit conditions, high funding costs and elevated refinancing risks," Xu said.

The constraints are pushing some Chinese corporate issuers to tap offshore markets for financing.

Moody's also notes that the recent cut in the required reserve ratio by the People's Bank of China, along with other measures, will help support system liquidity and financial stability to limit the disruptions from the de-risking campaign.

Smaller banks have reduced their reliance on wholesale funding in line with the Chinese central bank's directive by expanding their intake of structured deposits. The shift can hurt the banks' profitability as structured deposits require higher interest rates as compared to saving and demand deposits, the rating agency noted.

For higher returns, smaller regional banks have increased their investment receivables, which tend to have complex structures with limited disclosure, adding to the potential credit risks borne by regional banks, the report added.