China’s Financial Authorities Warns of Resurgence in Shadow Banking

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The China Banking and Insurance Regulatory Commission (CBIRC) has warned of the potential for a resurgence in Chinese shadow banking, despite efforts to severely curb its scope over the past several years.

Speaking at the Qingdao China Wealth Forum (在青岛·中国财富论坛) on 30 July, CBIRC deputy-chair Liang Tao (梁涛) said that as of the end of June 2022 Chinese shadow banking had fallen by 29 trillion yuan in scale compared to its peak.

“China’s shadow banking risk has markedly contracted, and outstanding assets have fallen greatly,” Liang said. “[We] have effectively contained the movement of funds from the real to the empty, providing room for finance to play a counter-cyclical adjustment role.”

Liang nonetheless warned of problems in the Chinese banking system that could lead to a return of shadow banking and associated risks.

“Some institutions are making use of inappropriate forms of financial innovation that has evolved into new forms of shadow banking, triggering a rebound and resurgence in shadow banking risk….we must maintain necessary vigilance against this.

“Certain products involve high leverage levels and conceal considerable risk….certain banks are not properly managing non-standard investment risk on their balance sheets, and asset categorisation and provisions standards are markedly lower than those for on-balance sheet loans,” he said.

“Some highly-leveraged enterprises are making use of unlicensed institutions to register and issue so-called financial plans to obtain funds, which when thoroughly investigated are actually self-financing arrangements for these enterprises, and thus highly disingenuous.”

Liang said that the next step would be to continue to dismantle high-risk forms of shadow banking, as well as strengthen risk monitoring of shadow banking.

“[We] will strictly prohibit multi-tiered nesting, empty circulation of funds, fleeing the real for the empty, fake financial innovation and other such forms of conduct,” Liang said.

“Financial institutions must earnestly implement new asset management regulations, complete reform of outstanding asset management operations involving bank wealth management products and trusts on schedule, and prevent any further occurrence of disorderly increases in leverage by means of cross-sector financial products.”