Chemistry Board

China Tighten Banking Rules

China is to rein in its fast-growing shadow banking system by requiring banks to provide extensive disclosures about the off-balance sheet investment products that they sell to customers, according to people briefed on the new rules.

The Chinese shadow banking system – credit flows beyond traditional bank loans – has increased fourfold in size since 2008 to about Rmb20tn ($3.2tn), or 40 per cent of gross domestic product. These flows were crucial in reviving the country’s growth last year, but banking analysts and rating agencies have warned that they pose an increasingly serious risk to Chinese economic stability.

Taken together, the new regulations could lead to a slowdown in the explosive growth of China’s shadow banking by making it tougher for banks to funnel deposits into off-balance sheet vehicles. In addition to the disclosures, there is also discussion about whether to establish a hard cap on the number of investment products that banks can issue as a percentage of their assets.

But the moves will not spell the end of shadow banking. Instead, they reflect a consensus among policymakers that credit flows outside the banking system are a healthy development for China, so long as they are monitored and kept in check.

Read full article