China's shadow banking sector needs more oversight and regulation

Blamed in part for the US subprime mortgage crisis, the shadow banking system has proliferated in China in recent years, arousing fears of possible economic instability.

Chinese financial regulators sought to alleviate those fears at a news conference during the 18th National Congress of the Communist Party of China on Nov 11.

"Shadow banking is inevitable when there is a growing need for diversified financial services which traditional banks can't provide," said Zhou Xiaochuan, governor of the People's Bank of China, the country's central bank, at the conference.

"But China's shadow banking system is different from that in some developed countries and its size is much smaller."

A clerk offers consultation services to a client at a micro-credit company in Beijing. The company provides microfinance services to farmers, micro-sized companies and SMEs. [Photo/bjreview.com.cn]

In the West, the core of the shadow banking system is turning credit relations by traditional banks into securitized credit relations. Shadow banking activities have grown nearly threefold in the last 10 years. The estimated assets of shadow banking totaled $67 trillion as of the end of 2011, according to a report released by the Financial Stability Board, or FSB, a Baselbased organization mandated by the Group of 20 economies to coordinate a regulatory response to the financial crisis.

In China, there is no complete, unified or accurate definition for its shadow banking system. Generally speaking, it refers to all non-bank loans, such as wealth management products with cooperation between banks and trust companies, underground finance, micro-credit companies, pawn shops, private financing, private-equity investment, hedge funds, and off-balance-sheet lending transactions, wrote business commentator Yu Fenghui in his blog.

The PBOC has introduced the concept of "social financing", which in addition to net new bank loans includes off-balance-sheet lending from banks, trust loans, corporate bonds and equity and funding from insurers, similar to Chinese shadow banking activities.

Social financing in the first three quarters of 2012 was 11.73 trillion yuan ($1.86 trillion), among which 43 percent was from credit access channels other than traditional banks, according to the PBOC. The proportion has increased quite a bit during the past several years.

Shadow banking in developed countries is a product of financial innovation, which is specially designed to evade regulation and supervision.

"Unlike in some foreign countries, most financial activities by non-bank financial institutions in China are under supervision," said Zhou.

Trust products and money management products are within the supervision of the China Banking Regulatory Commission," said Shang Fulin, chairman of the CBRC, at the same conference.

In October 2011, the CBRC required all financial institutions to report in detail their off-balance-sheet transaction activities.

Even though "we should remain alert and maintain effective supervision against all possible risks, we should encourage the diversification of China's financial businesses," said Zhou.