Don’t Stigmatise Shadow Banking as a Delinquent Child: Chinese Academy of Fiscal Sciences Chair

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One of China’s leading economists has called for great nuance and tact from regulators when dealing with the shadow banking sector, while also pointing to the potential for fintech to help prevent risk.

Liu Shangxi (刘尚希), head of the Chinese Academy of Fiscal Sciences and a member of the Chinese People’s Political Consultative Conference (CPPCC), said in an interview with Securities Daily that China’s regulators need to engage in in-depth research of shadow banking and other non-standard and off-balance sheet businesses.

According to Liu regulators cannot “simply view all forms of off-balance sheet, non-standard shadow banking as risk itself,” or consider shadow banking to be a “delinquent child.”

Liu said that while shadow banking “exists in the cracks” without standardisation or adequate regulation in many cases, it remains a “method of the market,” and provides a channel for many enterprises to obtain financing.

“When shadow banking is subject to strict rectification, total social financing drops sharply, indicating that this is in fact a financing channel that cannot be readily cut off.

“Otherwise, this will have a major impact upon the overall economy, and in particular those enterprises that are dependent upon shadow banking, and even potentially bring risk to the macro-economy.”

Liu said that risk in relation to local government debt was a key issue impacting the stability of financial markets and broader economic and social development.

According to Liu local governments need to earnestly address and research hidden debt and include it within the purview of regulation, as well as adopt more innovative regulatory methods.

Liu also pointed to fintech as a key means for both expanding financial inclusion in China and preventing financial risk.

According to Liu small and medium-sized enterprises in China continue to find it difficult and expensive to obtain financing, while for financial institutions the provision of credit to such enterprises can prove costly, low-return and risky.

“Information asymmetries can be resolved via the development of fintech,” said Liu, who pointed to cases where fintech had been successfully used to facilitate the provision of loans to small and micro-enterprises in China by minimising risk.

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