Chinese shadow banking groups are taking their pursuit of regulatory arbitrage to remote parts of the country, searching for provincial regulators who are less capable of bringing them to heel.
Multiple sources told Reuters that shadow banking groups are taking their operations to far-flung inland provinces, in order to take advantage of relative inexperience and lack of sophistication of local authorities by engaging in “regulatory swapping.”
The trend has emerged amidst China’s ongoing deleveraging campaign and crackdown on the shadow banking sector, as part of efforts to stymie systemic financial risk following a decade of credit-fuelled growth.
Beijing is intent upon cracking down even harder on shadow banking this year, with the introduction of tough new asset management regulations, and the proposed consolidation of banking and insurance authorities in order to improve regulatory coordination.
According to industry insiders, however, this toughness is only compelling shadow bankers to travel further afield to source regulatory loopholes.
Financial companies and trusts – two of China’s leading shadow banking vehicles, are teaming up with firms in remote, landlocked parts of the country such as Inner Mongolia, Gansu and Xinjiang, where the offices of the China Banking Regulatory Commission (CBRC) are staffed by personnel who are less experienced yet more willing to back local enterprise.
CBRC’s regional branches are spread around the country and still poorly coordinated, lacking a nation-wide database for all of the deals applications that the authority receives.
The regulator’s regional offices vary tremendously in resources, capabilities and strictness, with the CBRC bureau for Shanghai employing 230 employees, which is more than the 200-strong staff employed by the office for all of Hebei province.
For this reason it’s possible for a given branch of CBRC to approve a product that has been rejected by another office.
According to the sources Ping An Trust is one example of a shadow banking operator taking advantage of the inconsistency and lax practices of local CBRC branches.
They said that Ping An uses a remote trust to submit lending documents to a local CBRC branch, providing that trust with as much as 0.003% of the deal value as payment.
Insurers are highly incentivised to engage in regulatory swapping, given that the China Insurance Regulatory Commission is considered tougher than CBRC.
The likelihood that a given financial product will obtain approval can vary depending upon its the nature of its issuer as well as regulator responsible for it.
While CIRC applies greater scrutiny to products and requiring that insurers obtain certificates for them, CBRC makes no such demand of trust firms, and doesn’t review their underlying assets.