China draws up new rules to curb shadow banking risks
Chinese one-hundred yuan banknotes are arranged in a bowl for a photograph in Hong Kong, China, Tuesday, Dec. 10, 2013. The yuan rose to the strongest level in 20 years today on signs the Communist Party is already delivering on its November pledge to give markets a more “decisive” role in the world’s second-largest economy©Bloomberg
China has drawn up new rules aimed at containing risks in its burgeoning shadow finance sector while enshrining non-bank institutions as a pillar of its economy.
The draft regulations, a copy of which was obtained by the Financial Times, mark an attempt by the government to better co-ordinate regulation of the country’s shadow banks, but also indicate a more permissive official stance than many observers had anticipated.
China’s financial system was long dominated by banks, which traditionally accounted for more than 90 per cent of all funding in the economy. But over the past five years the rise of non-bank institutions, especially trust companies, has changed the complexion of Chinese finance, with banks now providing roughly half of all new funding in the economy.
The boom in shadow banking has been seen by critics as a major risk, helping fuel a surge in Chinese debt levels and making credit flows less transparent. However, proponents have countered that shadow banks represent a shift to a more diversified, market-led financial system.
The new rules – which were first reported by China Business News, a local newspaper, and have not yet been publicly released – take a middle ground between those views. While demanding enhanced supervision, the regulations say shadow banking has also benefited the economy.
“The emergence of shadow banks is an inevitable result of financial development and innovation. As a complement to the traditional banking system, shadow banks play a positive role in serving the real economy and enriching investment channels for ordinary citizens,” the document said.
Regulators around the world have stepped up their oversight of non-bank institutions since the global financial crisis, recognising that entities from money market funds to private equity firms can have significant impacts on economic stability. From an international standpoint, non-bank “shadow” financing in China is still relatively small but it has been growing by as much as 50 per cent a year.
Officially titled “A notice about some issues related to strengthening shadow banking regulation”, the new Chinese draft rules run to just seven pages.
Issued by the State Council, or cabinet, the rules are known as “Document no. 107”. The next step will be for regulatory agencies to draw up more detailed implementation guidelines.
Both Haitong Securities and China Securities, two major domestic brokerages, said the draft rules would limit off-balance sheet lending by banks and place non-bank institutions under closer scrutiny.
Yet analysts said the proposed new rules were not as harsh as the “Document no. 9” drafted last year by the Chinese banking regulator to limit interbank lending.
“Depending on detailed ministry-level documents, I don’t think it will be tougher,” a banking analyst said. “Most of the principles being emphasised are not new.”
Document no. 107 constitutes China’s first overarching regulatory framework for shadow banking and tries to define the slippery term, which has been used to refer to everything from illegal underground banks to corporate bonds.
The document identifies three kinds of shadow banks and vows to monitor their development more closely.
First, there are those with no operating licences, such as internet finance companies, that are subject to no regulations. The second group are those that do not hold licences and are only partly regulated, such as credit-guaranteed companies. The final batch are those that have licences but face inadequate regulation such as money-market funds.
“At present, our country’s shadow banking risks are under control overall,” the document stated. “But as the 2008 global financial crisis demonstrated, shadow banking risks are complex and hidden, and vulnerabilities can emerge suddenly and spread easily causing systemic problems.”
Although issued by the State Council, Document no. 107 is believed to have been drafted jointly by the central bank and the banking, securities and insurance regulatory commissions, a sign of the government’s desire to develop a more co-ordinated approach to financial regulation.