Beijing warns of dangers in shadow banking

PUBLISHED : Monday, 06 January, 2014, 2:32pm
UPDATED : Tuesday, 23 January, 2018, 11:45am

The mainland's cabinet has warned of the dangers lurking in the unbridled growth of the shadow banking sector.

The State Council's warning elevates the issue from a mere banking concern and shows the increasing seriousness with which Beijing views the problem.

The cabinet recently issued a document defining shadow banking and ordering government departments, financial regulators and local governments to oversee the under-regulated firms involved in such lending, bankers and analysts say.

It said shadow banking was a "beneficial" and "inevitable" consequence of financial development, but supervision should be intensified by sharing responsibilities and improving co-ordination to contain risks, according to sources.

Local government debt has swollen to 17.9 trillion yuan (HK$22.7 trillion) by the middle of last year, nearly 70 per cent more than at the end of 2010, with the bulk of credit coming from the shadow banking system.

Trust firms and other financial intermediaries have channelled a flood of funds to local government financing vehicles, property developers and firms that have had difficulty obtaining loans from banks since 2008, increasing the mainland's financial leverage and complicating regulatory supervision.

Shadow banking entities include companies without financial licences, including internet finance firms, third-party wealth management firms, guarantee companies and micro-credit companies. Businesses in the sector also included money market funds, asset securitisation and wealth management services provided by financial institutions, the sources said, citing the document.

Banking, securities and insurance regulators as well as the National Development and Reform Commission, the central bank, the related ministries and local governments should work out supervisory details to regulate the sector, the cabinet said.

The document also warned of risks from banks' off-balance-sheet businesses and banned their wealth management products from being pooled into undefined trust firm projects.

"The tightening of shadow banking will likely slow fixed-asset investment this year," said Yuan Gangming, a researcher with the Chinese Academy of Social Sciences. "We'll see more defaults."

At its annual meeting yesterday, the banking regulator noted risks from loans to local government financing vehicles, the property sector and industries with overcapacity as well as wealth management services, trust businesses and those stemming from micro-credit and guarantee companies.

The China Banking Regulatory Commission said it would also "keep a close eye" on liquidity risks and ward off information technology risks to prevent financial risks.