Bringing China’s Shadow Banking More Into The Light

This Bystander has noted before the growing concerns among policymakers in Beijing about China’s shadow banking system, the unregulated credit flows that have thrived beyond the formal restrictions on bank loans. This has quadrupled in size since 2008; at $3.2 trillion it is equivalent to 40% of China’s GDP.

Central bank officials have become increasingly fearful that it poses a potential systemic risk to financial stability. So now it is being reined in, according to a report in the Financial Times. Banks will reportedly be required to provide fuller disclosures about their off-balance sheet investment products and may face a cap on the percentage of their assets such products can account for.

This is not an attempt to snuff out such lending; it has funded much of the infrastructure development that China has used to stimulate its economy since the global financial crisis in 2008, and provided credit to privately owned enterprises that find themselves down the pecking order for bank loans behind state-owned companies and the politically well connected. It has also created high-yielding banking products for wealthy bank customers who otherwise face the miserly savings rates offered by Chinese banks.

This is all a broadening of China’s financial markets that reformers have pushed for. But it is happening haphazardly wherever it can find a regulatory vacuum. Local authorities have run up huge levels of debt–$2.2 trillion, not far off Italy’s market rattling $2.6 trillion–much of it off-balance sheet in special investment trusts. There have also been a string of recent problems with wealth management products, each small in itself but collectively an alarming preview of what could happen on a far larger scale.

Hence the attempt now bring that lending out of the shadows and into the light of the regulated financial system where it can be checked and monitored.