Beijing urged to take quick action on shadow banking

Mainland regulators must take quick action to stop the so-called shadow banking problem from snowballing, which has emerged as one of the top threats to the nation's financial stability this year, analysts warn.

Market participants have grown increasingly concerned in the past few months about shadow banking after a bank scandal in Shanghai caused public jitters.

Shadow banking, or underground lending, raises money illegally from the public with promises of high interest rates.

So far, it remains unclear how big the entire shadow banking system is, but it could include trusts, wealth management products, underground finance and off-balance-sheet lending. Some research reports suggested the value could be about 30 trillion yuan (HK$37.3 trillion).

Edward Ding, the chief economist at China Merchants Securities, said one reason it was difficult to get a clear size of the problem was that the official definition of shadow banking was vague. On the other hand, he noted that an overly broad definition could hurt financial innovation, so regulators must exercise care in defining what constituted shadow banking.

"I never believe government regulation can solve all problems. Regulation of shadow banking is only necessary when public interest and the systemic risk of the financial industry are involved," Ding said, adding Beijing should first focus on two types of shadow banking business - high-return wealth management products offered over bank counters and sophisticated trust investment products.

Last month, Huaxia Bank, a medium-sized state-controlled lender, surprised the market with an announcement that a former employee at a branch in Shanghai had sold wealth management products that were not directly issued by the lender. Those products eventually defaulted.