Shadow Banking is a Necessary Adjunct to China’s Financial Markets: PBOC Head


The head of the Chinese central bank has said that the shadow banking sector isn’t necessarily a “negative” for the economy, and in fact plays a vital role in China’s financial system.

Speaking at the Sina Changan Forum  on 13 December People’s Bank of China (PBOC) governor Yi Gang said that “shadow banking is in fact a necessary supplement to financial markets,” according to a report from China Securities Journal.

According to Yi shadow banking “isn’t an entirely negative term, and only needs lawful, standardised operation in order to become an effective part of financial markets.”

Yi stressed, however, that poor management in the shadow banking sector could lead to the onset of risk, particularly with respect to:

  •  Asset management operations: implicit guarantees and links between multiple sectors and markets can readily cause the transmission of risk across institutions, sectors and markets;
  • Interbank operations: Certain interbank operations are in reality lending or equity investment operations, albeit with inadequate capital or provisions;
  • Asset securitisation: some financial institutions have made use of asset securitisation to dodge macro-controls or financial regulation. without actual sales or bankruptcy-remote  entities.

Yi Gang also said that official efforts to contain shadow banking and interbank operations had achieved some effectiveness, with the scope of shadow banking contracting and greater standardisation of the operations of financial institutions.