"We expect that a combination of tighter liquidity conditions and stricter regulatory scrutiny on the banks' off-balance-sheet activities will curb the banks' incentives to engage in regulatory arbitrage and gradually dampen the fast-growing component of shadow banking activities," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific.

On the other hand, demand from shadow bank borrowers will be relatively inelastic to higher interest rates, given the continuing financing needs in sectors such as property, local government financing vehicles and overcapacity industries.

Moody's also says that the composition of credit flows are undergoing important shifts, even while economy-wide leverage continues to increase.

In recent months, credit flows have been sustained by bank lending and "core" shadow banking. Mortgage loans have continued to contribute a rising share of headline bank lending, while in Q4 2016, the growth rate of trust loans registered its first significant increase since mid-2014.