China Shadow Banking Report Touts 16 Trillion Yuan Reduction, Flags Further Efforts to Better Regulate Sector

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The China Banking and Insurance Regulatory Commission (CBIRC) has outlined further measures to better regulate the country’s mammoth shadow banking sector.

The “China Shadow Banking Report” (中国影子银行报告) issued by CBIRC highlights the need to “establish and improve sustained regulatory systems for shadow banking,” with specific focal points including:

  1. Improvements to statistical monitoring, including prompt and dynamic assessment of the scope and forms of shadow banking, as well as risk developments and changes to risk levels;
  2. Strict prevention of rebounds or resurgences in shadow banking;
  3. Establishment of risk separation – with a focus on clarifying distinctions between publicly offered and privately offered products, on-balance sheet and off-balance sheet operations, and entrusted and own operations. The establishment of corresponding firewalls, and strict prevention of reciprocal risk contagion and overlap;
  4. Improvements to regulatory systems, including i) ensuring full coverage regulation, without any regulatory “gaps” or “blind spots,” and the inclusion of all shadow banking activities within the purview of regulation; ii) unification of regulatory standards for the same types of institutions and products, and reductions in arbitrage via “empty” transfers of funds; iii) improvements to shadow banking risk categorisation and risk weighting, and standards for provisions coverage;
  5. Prudential undertaking of comprehensive operations.

The Report points out that Chinese shadow banking first began to see especially rapid growth after 2008, with annual increases rising to over 20%.

Since 2017 China’s financial regulators have sought to “defuse” the shadow banking sector, bringing broadly defined shadow banking down from a peak of 100.4 trillion yuan at the outset of 2017 to 84.8 trillion yuan as of the end of 2019, for a 16 trillion yuan reduction.

Over the same period higher risk, narrowly defined shadow banking fell to 39.14 trillion yuan, for a reduction of 12 trillion yuan compared to its historic peak.

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