Chinese regulator says shadow banking sector needs constant scrutiny to guard against risks spilling over into the economy

Regulations on shadow banking need to be strengthened as some inappropriate financial innovation has created new risks, CBIRC official says

China’s clampdown on shadow banks has shrunk the sector by 29 trillion yuan as of end June

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China’s shadow banking sector, which was estimated at US$12.9 trillion in 2019, had shrunk by US$4.3 trillion at the end of June. Photo: AFP

Published: 4:35pm, 31 Jul 2022Updated: 4:56pm, 31 Jul 2022

A top official at China’s banking and insurance watchdog stressed the need for tighter scrutiny to guard against shadow banking risks, while pointing out that regulatory efforts had significantly reduced activity in the sector.

China needs to dismantle shadow banking risks and strengthen regulation to reduce related risks in the banking system, Liang Tao, vice-chairman of the China Banking and Insurance Regulatory Commission, said at a forum over the weekend.

Liang noted that China’s shadow banking sector had shrunk by 29 trillion yuan (US$4.3 trillion) as of end June from an all-time peak, which he did not specify.

China’s shadow banking sector, which includes wealth management fund products, entrusted loans, small credit and peer-to-peer loans, was estimated at 84.8 trillion yuan in 2019, equivalent to 86 per cent of gross domestic product and 29 per cent of the nation’s total banking assets.

Liang Tao, vice-chairman of the China Banking and Insurance Regulatory Commission, pictured in November 2020. Photo: Handout

Some products in the banking system have relatively big hidden risks because of their complicated structure, while inappropriate financial innovation has led to new variants of shadow banking, state media Securities Daily quoted Liang as saying in a report on Saturday. More caution should be exercised, he said.

The comment highlighted regulators’ growing concerns of financial risks in the banking system amid scandals in Henan and Anhui provinces as well as a mortgage-payment revolt that has spread to over 90 Chinese cities.

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