China central bank sees role for shadow banking

A senior official with the mainland's central bank said the role of the shadow banking system cannot be simply denied just because of the risks it has created, warning that rigid rules may curb financing for smaller and weaker firms, hurting the economy.

Regulators should explore "the most proper" way of supervision that could control risks in shadow banking while still enhancing financial services to the weakest sectors in the real economy, People's Bank of China deputy governor Hu Xiaolian told the International Conference of Banking Supervisors in Tianjin yesterday.

"The fast development of shadow banking is in many cases driven by regulatory arbitrage," Hu said. "But we shouldn't simply adopt a negative attitude because of such regulatory arbitrage activities.

"I'd like to emphasise that … we should ensure regulatory policy should strengthen, instead of harming, financial services for the weak areas in the society, such as small firms."

As mainland banks tend to favour lending to big state-owned clients with implicit government guarantees, Beijing's targeted easing has failed to offer enough support to small and medium-sized enterprises.

The economy faces risks of cooling further and missing the annual growth target of about 7.5 per cent after slowing to 7.4 per cent in the first half.

The shadow banking system has become an important alternative channel to finance those restricted from normal bank loans. The system, defined by the International Monetary Fund as "off-balance-sheet and non-bank financial intermediation", includes internet finance, micro-lending, asset securitisation and some wealth management products.