China has made headway in reining in its shadow-banking sector, Fitch has said in a report, with risk control in the financial system a priority since the beginning of the year.

The rating agency believes the sector has become smaller in response to a regulatory clampdown which began early this year.

Interbank assets, a major carrier of shadow-banking activities, fell 13.8 percent year on year at the end of August, while interbank liabilities went down 1.6 percent, according to the China Banking Regulatory Commission.

It was the first since 2010 that the two indicators dropped at the same time, Fitch said, adding that joint-stock commercial banks, which had been more brisk in interbank activities, saw the sharpest decline.

Growth of wealth management products (WMPs) continued to slow. Fitch estimated the outstanding WMP balance to have declined by around 10 percent this year.

Shadow banking, which takes place outside regulatory scope, remains a key source of risks to financial stability following years of rapid growth.

Greater regulatory scrutiny is in the pipeline.

In regard to concerns on liquidity triggered by dropping shadow-banking activities, Fitch said the central bank's latest cut to the amount of cash lenders must hold as reserves will prevent tighter liquidity from having adverse effects on the real economy.

The People's Bank of China announced a targeted reduction in the reserve requirement ratio to encourage commercial banks to improve credit support for small businesses, impoverished groups and agriculture, among others, at the end of September.

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