Cookie consent

We use cookies to improve your experience on this website. By continuing to browse our site you agree to our use of cookies. Tell me more | Cookie preferences

China to tighten shadow banking rules

Past explosive growth in China's shadow banking system could slow down after new transparency requirements take effect

Story highlights

  • China to rein in shadow banking system by requiring banks to provide greater disclosure
  • Chinese shadow banking system has quadrupled in size since 2008 to about $3.2 trillion
  • Funds were crucial in reviving country growth last year but now pose risk to stability
  • New rules could make it tougher for banks to funnel deposits into off-balance sheet vehicles

China will rein in its shadow banking system by requiring banks to provide greater disclosure about their off-balance sheet activities, according to people briefed on the new rules.

The Chinese shadow banking system -- credit flows beyond traditional bank loans -- has quadrupled in size since 2008 to about Rmb20tn ($3.2tn), or 40 per cent of economic output. These flows were crucial in reviving the country's growth last year. But banking analysts and rating agencies have warned that they pose an increasingly serious risk to Chinese economic stability.

There is also discussion about whether to establish a hard cap on the number of off-balance sheet investment products that banks can issue as a percentage of their assets.

Taken together, the new regulations could lead to a slowdown in the explosive growth of China's shadow banking by making it tougher for banks to funnel deposits into off-balance sheet vehicles.

But the moves would not spell the end of shadow banking. Instead, they reflect a consensus among policymakers that credit flows outside the banking system are a healthy development for China, so long as they are monitored and kept in check.

The disclosure requirements will begin as a trial in Shanghai in late March or early April, according to a person who has seen the draft rules. Banks will be asked to register their wealth management products or WMPs -- deposit-like instruments that offer higher yields and are mostly held off-balance sheet -- with the local regulator.

"The main thing is monitoring the risks of the WMPs," the person said. "The disclosures will fully cover the size, the variety, the maturity and the interest payment information for the products."

So long as banks pay back the principal and interest at maturity, which is typically one year or less, it will be easy for them to continue selling new investment products, he said.

More radical yet is the debate over establishing a hard ceiling on the issuance of the WMPs. Two bankers said they had been informed that the regulator was considering limiting such assets to 20 per cent of their deposit base.

Currently, WMPs amount to 10 per cent of total deposits in the Chinese banking system. But that is up from virtually nothing three years ago. Smaller banks have been particularly aggressive in their issuance of WMPs as a way of attracting new customers and several are already near the 20 per cent mark.

It is not clear whether the cap would be enforced as a rule or simply given to banks as a guideline.

Until recently regulators had taken a permissive stance towards shadow financing, arguing that was an important part of channelling money flows away from banks, which have historically provided about 90 per cent of credit in China through ordinary loans.

Zhou Xiaochuan, the central bank governor, said late last year that shadow banking in China was much smaller in scale and better controlled than its counterpart in developed economies, where lending by hedge funds and investment banks magnified the global financial crisis.

However, problems with three separate bank-issued investment products in December raised the spectre of defaults and appear to have contributed to the change in attitude.

In a speech four weeks ago Yan Qingmin, assistant chairman of the China Banking Regulatory Commission, said that some banks were improperly creating asset pools with their WMPs -- a practice whereby inflows from new investors can be used to repay old investors and thereby cover up failed investments.

A slowdown in the issuance of WMPs would limit the expansion of shadow banking in China, depriving companies such as property developers of a vital alternative source of cash since the regulator has all but stopped banks from lending to high-risk borrowers.

In a note to clients last week Zhang Zhiwei, an analyst with Nomura Securities, warned about the economic impact of a policy response to the rising risks in shadow banking.

"We believe the government will tighten policies to contain these risks and, in turn, drag down growth in the second half," he said.

Additional reporting by Emma Dong

      CNN Business

    • An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009 in Baghdad, Iraq. Iraq and a grouping of U.S and European oil companies Exxon Mobil Corp and Royal Dutch Shell PLC signed a $50 billion contract today to develop the West Qurna oilfield, two days after the Iraqi South Oil Company signed a technical service contract with Britain's BP and China's CNPC to develop the Rumaila oilfield. The Iraqi government is trying to attract foreign investment, especially in the oil sector, in hopes of reviving its war-torn economy. Iraq has the third largest oil reserve in the world but it is producing way below its potential. (Photo by Muhannad Fala'ah/Getty Images)

      Airstrikes, rebels seizing control of oil fields, plus a severe refugee crisis are a recipe for market panic. So why are Iraq oil prices stable?
    • A view of gloves and boots used by medical staff, drying in the sun, at a center for victims of the Ebola virus in Guekedou, on April 1, 2014. The viral haemorrhagic fever epidemic raging in Guinea is caused by several viruses which have similar symptoms -- the deadliest and most feared of which is Ebola. AFP PHOTO / SEYLLOU (Photo credit should read SEYLLOU/AFP/Getty Images)

      The biggest Ebola outbreak in history is taking its toll in Western Africa, hitting some of West Africa's most vulnerable economies.
    • People enter a casino in Las Vegas, Nevada, on April 18, 2009. Las Vegas is the most populus city in the US state of Nevada and internationally renowned major resort city for gambling, shopping, fine dining and entertainment. Las Vegas which bills itself as the �Entertainment Capital of the World� is famous for the number of casino resorts and associated entertainment. AFP PHOTO/Jewel SAMAD (Photo credit should read JEWEL SAMAD/AFP/Getty Images)

      Macau has overtaken Switzerland in the wealth stakes, being named the world's fourth richest territory by the World Bank.
    • spc marketplace middle east ata atmar a_00010015.jpg

      Saudi Arabian Bateel brand is best known for its delectable dates but it now has more than a dozen cafes and a new bakery in the works.
    • Vantablack designed by Surrey NanoSystems absorbs 99.96% of all light. It however will not be the solution to the creating the world's ultimate slimming black dress! A dress made out of this material would render the curves and contours of the human body invisible and would leave the wearer looking like 'two dimensional cardboard cut-out.'

      A British nanotech company has created what it says is the world's darkest material. It is so dark the human eye can't discern its shape and form.
    • Jibo robot is designed to be an organizer, educator and assist family members. CNN's Maggie Lake met him and says she was impressed with his skills.
    • A picture taken on March 15, 2014 shows children playing at the sprawling desert Zaatari refugee camp in northern Jordan near the border with Syria which provides shelter to around 100,000 Syrian refugees. Syrian refugees in the seven-square-kilometre (2.8-square-mile) Zaatari camp in Jordan fear that President Bashar al-Assad's likely re-election this year will leave their dream of a return home as distant as ever. The brutal war in Syria between the regime and its foes shows no sign of abating and has killed at least 146,000 people since it erupted in mid-March 2011. And 2.5 million Syrians have fled abroad and another 6.5 million have been internally displaced. Jordan is home to more than 500,000 of the refugees.

      Sandwiched in between Iraq and Syria, Jordan's destiny seems to be one of a constant struggle for survival. John Defterios explains.
    • SHEFFIELD, ENGLAND - NOVEMBER 18: Queen Elizabeth II wears 3 D glasses to watch a display and pilot a JCB digger, during a visit to the University of Sheffield Advanced Manufacturing Research centre, on November 18, 2010 in Sheffield, England. (Photo by John Giles - WPA Pool/Getty Images)

      At the last football World Cup, it was all about 3D. This time around, it's nothing less than 4K.
    • An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009 in Baghdad, Iraq. Iraq and a grouping of U.S and European oil companies Exxon Mobil Corp and Royal Dutch Shell PLC signed a $50 billion contract today to develop the West Qurna oilfield, two days after the Iraqi South Oil Company signed a technical service contract with Britain's BP and China's CNPC to develop the Rumaila oilfield. The Iraqi government is trying to attract foreign investment, especially in the oil sector, in hopes of reviving its war-torn economy. Iraq has the third largest oil reserve in the world but it is producing way below its potential. (Photo by Muhannad Fala'ah/Getty Images)

      Iraq produces 3.3 million barrels per day and has the world's fourth-largest oil reserves. But the current crisis is putting all this in danger.
    • Valves of gas pipe-line are seen in the gas station not far from Kiev on March 4, 2014. The European Union will help Ukraine pay the $2.0 billion it owes to Russian gas giant Gazprom, a top official said Tuesday, as part of an aid package reportedly worth more than one billion euros. AFP PHOTO/ ANDREY SINITSIN (Photo credit should read ANDREY SINITSIN/AFP/Getty Images)

      The gas standoff between Russia and Ukraine could have a knock-on effect on Europe. Explore this map to find out why is the EU nervous.