Premier Wen Jiabao focuses on shadow banking risks for first time
For the first time, premier highlights the dangers of default in unregulated financial sector
The government work report delivered by Premier Wen Jiabao yesterday singled out risks in the mainland's financial sector for the first time. That reflects mounting concerns over the default dangers banks face and the under-regulated yet burgeoning shadow banking system.
Talking about the difficulties and problems in economic and social development, Wen told the National People's Congress (NPC) there were "potential risks in the financial sector".
China should "strike a balance" between boosting economic growth, stabilising prices and preventing financial risk, Wen said.
Yao Wei, China economist at Societe Generale, said the report's emphasis on financial risk when mentioning monetary policy objectives was rare in China's history and reflected escalating concerns on the financial sector.
China Banking Regulatory Commission chairman Shang Fulin said recently that banks faced increasing default risks from loans to local government financing vehicles, real estate developers and industries with excess capacity.
Lenders should also try to "prevent risk contagion" from the underground financing market and the shadow banking system, the regulator has warned.
The shadow banking system, including wealth management products and trust loans, has been booming. The proportion of bank loans in total social financing - a measure of all financing means - fell to 52 per cent last year from 91 per cent in 2002, underscoring their declining importance.
In the government work report, Wen said China would guide financial institutions to "operate prudently" and tighten oversight on risks to lenders' off-balance-sheet activities.
Bank of China chairman Xiao Gang said "risks relating to shadow banking had emerged", with the cash flows of some projects unable to cover the high cost of financing in shadow banking.
The mainland has no unified, official definition of shadow banking, but Xiao, one of the first officials to note the risk of shadow banking last year, said it referred to the non-bank credit activities of financial intermediaries.
He said the merits of shadow banking included better reflection of market rates than bank interest rates and the fact that it boosted economic development by giving funding support to companies unable to acquire bank loans.
"There are irregularities in this sector," he said. "However, generally speaking, the risk is controllable."
Bankers and economists said a major clampdown on shadow banking was unlikely as leadership transitions had always been accompanied by investment booms. But the government is expected to be wary about overexpansion of credit.