China regulator to tighten supervision over shadow banking

China will further tighten supervision over the shadow banking sector, the country’s banking regulator said on Friday.

This measure is part of an ongoing campaign to control off-balance sheet lending by the country’s financial institutions.

However, the China Banking Regulatory Commission will continue to support buyers of affordable housing, first-time home buyers and small- and medium- sized businesses amid signs of a slowing economy.

“Currently, the economy, broadly speaking, is stable. But downward pressures are relatively significant which a reflection of … is imperfect financing structures and inefficiencies in finance allocation and use.

“Also, there are difficulties with SME (small and medium enterprises) financing,” a press release circulated at the CBRC’s conference said.

Wang Zhaoxing, a vice president at the China Banking Regulatory Commission, told a news conference that the regulator will improve ways to manage deposit-to-loan ratios.

This is an indicator of a bank’s ability to absorb risk, and classify bad loans.

The term shadow banking refers to off-balance sheet lending by banks.

It also refers to any financing provided by a non-bank entity, such as credit guarantee firms, trust companies and other lenders, including pawn shops, for Chinese borrowers.

The government has been trying to rein in the riskiest forms of non-bank credit, which has grown rapidly in China since 2010.

Government is afraid that the funds were being used to roll over bad debts and exacerbating asset price bubbles in real estate and industrial overcapacity.

However, Beijing does not want to eliminate all forms of shadow banking as it can also play a positive role in allocating and pricing capital.

Some shadow banking help diversify funding channels in an economy historically over-dependent on bank lending for finance.

Indeed, the growth of total social financing – a home-grown indicator that measures shadow banking as well as traditional lending – slowed in April.

This measured streak highlighted the risk that efforts to restrain high-risk lending could have knock-on effects on healthy credit growth if not handled correctly.

The shadow banking sector may be worth up to 27 trillion yuan (4.32 trillion dollars).

This financial figure accounts for nearly a fifth of the nation’s banking sector, according to a recent report by the Chinese Academy of Social Sciences.

The International Monetary Fund said in April that reining in China’s shadow banking sector was crucial to global efforts to prevent the risk of a prolonged world slump.

China’s central bank pledged in March to improve its shadow banking sector monitoring, as part of an effort to make its data on bank credit and interest rates more accurate.

CBRC will improve credit asset securitization, and plans to maintain steady monetary policy and make minor adjustments as needed, it added.

Wang added that the regulator will continue to oversee online financing to ensure it develops in a healthy way.

Reuters/NAN