CSRC Flags Crackdown on Shadow Banking “Channel Operations”

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The China Securities Regulatory Commission has flagged a crackdown on “channel operations” employed by members of the banking sector to shift their investments off balance-sheet.

At press conference held on 19 May, CBRC spokesman Zhang Xiaojun said that the regulatory agency it would launch a “comprehensive ban” on channel operations, emphasising that banks would be forbidden from “transferring” asset management responsibility.

Channel operations are an informal term that has recently emerged which has to banks entrusting funds to financial institutions such as securities firms or funds for investment, yet retaining actual control of asset management while the later serve simply as conduits or channels.

China’s asset management sector has enjoyed flourishing growth since the turn of the decade on the back of channel operations driven by the off-balance sheet investment operations of banks.

As a key abettor of the shadow banking sector and a burgeoning source of potential risk, handling of channel operations have been the subject of much recent speculation amidst the ongoing heavy handed crackdown on financial institutions by regulators, as well as concerted efforts to deleverage the Chinese economy.

This speculation has been heightened by recent scandals involving channel operations, chief amongst them a case involving Zhongshan Securities and the Qingdao branch of Industrial Bank.

Industrial Bank’s Qingdao branch took Zhongshan Securities to court over breach of contract in relation to its “Zhongshan Rongsheng No. 5 Targeted Asset Management Plan.”

Not long prior to this Avic Securities and Aijian Securities were both subjected to penalties for overdraft transactions in relation to targeted asset management plans.

Channel operations in certain areas have already seen flagging growth since 2016 as a result of heightened regulatory scrutiny.

The 2016 asset management operations report released by the Asset Management Association of China indicate that channel operations have seen a general deceleration, with the growth level last year holding roughly steady with that for 2015.

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