China estimates shadow banking worth US$12.9 trillion as it moves to clean up high-risk sector
- Chinese regulators say shadow banking sector equivalent to 86 per cent of gross domestic product in 2019
- Industry must be ‘constantly dismantled’ as part of China’s financial de-risking campaign, authorities say
China’s banking regulator has for the first time clearly defined shadow banking activities and estimated their value to be about 84.8 trillion yuan (US$12.9 trillion) in 2019, a step that may lead to further cleaning up of the opaque sector that authorities say endangers financial stability.
A narrower definition – which excludes wealth and asset management products from banks and insurers, as well as asset-backed securities – found the sector to be worth 39.1 trillion yuan.
“Such high-risk businesses must be constantly dismantled,” the regulator said on social media, adding solving the issue was an important part of China’s financial de-risking campaign.
Though authorities had moved to clean up parts of the sector, CBIRC warned that “some high-risk shadow banking activities may come back in the name of innovation”.
The regulator is under pressure to tackle unregulated borrowing and lending, which provides a lifeline for some of the country’s most vulnerable consumers and small businesses that cannot access the traditional banking system, because it has led to instances of fraud and social unrest in China.
Beijing is currently taking stock of its broader financial vulnerabilities, which have been brought into sharper focus due to the economic damage resulting from the coronavirus pandemic. It has recently moved to tighten regulation of its financial technology giants and troubled small lenders backed by local governments.
Rating agency Moody’s estimated that the value of China’s shadow banking industry rose by 650 billion yuan in the first half of this year, led by asset management related business, which was funded by wealth management products and undiscounted bankers’ acceptances.
To help the economy recover from the coronavirus pandemic, China’s asset management sector, which accounts for most shadow banking activity, has been given until the end of 2021 to meet tighter requirements introduced by the central bank.
CBIRC has pledged closer monitoring of shadow banking activities, but no quantitative targets were revealed in the report.
Chinese authorities have tried to clean up the sector before. Between 2017-19, broad-based shadow banking activity was reduced in value by 16 per cent from its peak of 100.4 trillion yuan. Under the more narrow measure, the size of the sector dropped by 23 per cent over the same period to 39.14 trillion yuan.
