Are Interbank Activities Behind Explosive Growth in Chinese Shadow Banking?


Huang Zhilong, senior researcher and head of the macroeconomic research centre of the Suning Institute of Finance, says that interbank activities are the chief source of dramatic expansions in China’s burgeoning shadow banking sector that regulators are still struggling to contain.

Speaking to Securities Daily Huang said that interbank business as well as a “disaster” zone for the regulatory breaches and various forms of illicit arbitrage and malfeasance highlighted by Chinese regulators as besetting problems for the financial sector.

According to Huang addressing problems in relation to interbank business would be the key to “deleveraging of the entire financial system” and achieving regulatory targets.

“During the past several years interbank activities have expanded too rapidly, and this has been the source of empty internal transfers of funds within the financial system,” said Huang.

These interbank transfers typically involve a large-scale bank first obtaining low-cost funds from the central bank, before subsequently stowing them with smaller lenders such as municipal commercial banks or rural commercial banks via interbank deposits or loans, instead of channelling them to the real economy directly.

Because of lower levels of compliance amongst small-scale lenders, this form of “regulatory arbitrage” practised by the bigger banks exacerbates risk within China’s financial system, as well as the cost of capital and difficulties experienced by members of the real economy when it comes to securing funds.

Since the start of the year the China Banking Regulatory Commission and the People’s Bank of China have placed heavy emphasis on cleaning up interbank business within the Chinese financial sector, as part of an ongoing campaign to deleverage the economy.

Since the start of the second half financial regulators have stepped up their scrutiny of China’s interbank activities, with PBOC recently reprimanding as many as 40 banks for interbank account violations.

Data from the CBRC further indicates that since the start of July of the agency and its regional branches have issued a total of 227 fines to banking institutions, for a total amount of 369.653 billion yuan.

Some of the heavier punishments have been meted out to banks for regulatory breaches in relation to interbank business, with the Longjing Village Commercial Bank in Beijing receiving a fine of 1.3722 million yuan

Official data also indicates that the balance sheets of banks in Beijing have contracted significantly as a direct result of the crackdown on interbank business.