China shadow banking
China's shadow banking system can be described as credit intermediation involving entities and activities outside the regular Chinese banking system. Shadow banking is fairly common globally; however, in most countries this practice originates from non-banks rather than commercial banks. China's shadow banking system has experienced rapid growth since the global financial crisis.
Shadow banking has at times been worth as much as 87% of China’s GDP; this figure is high partially due to lack of historical regulation. In January 2018, the China Banking Regulatory Commission published a draft regulation aiming to align China with the Basel Committee on Banking Supervision’s standards for commercial banks' large exposures. If this regulation is adopted, banks' exposure to unidentified counterparty risk within the underlying assets of structured investments must be below 15% of the banks' Tier 1 capital by the end of 2018.
Shadow banking in China must be viewed in the context of a system which remains dominated by banks, especially large state-controlled banks, and in which the state provides a great deal of direction to banks, through a variety of regulations and formal and informal guidance. In China, where banks are discouraged from lending to certain industries and are mandated to offer frustratingly low interest rates on deposits, non-banks fill the gap. About two-thirds of all lending in China by shadow banks are "bank loans in disguise".
Like the US shadow banking system, the China shadow banking system emerged to get around banking regulations. Scholars such as Douglas J. Eliott, Arthur R. Kroeber and Yu Qiao believe that the following pressures have fueled the growth in China shadowing banking:
- Caps on bank lending volumes imposed by the People's Bank of China (PBOC)
- The limit of bank loans to deposits of 75% is constraining
- Regulators discourage lending to certain industries
- Most non-bank channels have lower capital and liquidity requirements
- Shadow banks are not subject to bank limits on loan or deposit rates
- Shadow banking avoids costly PBOC reserve requirements
Wealth management products and trust productsEdit
The two most important categories of China's shadow banking products are wealth management products (WMPs) and trust products. Retail investors are being given exposures they don’t fully understand when investing in mainstream products.
- "Strengthening the Oversight and Regulation of Shadow Banking" (PDF). Financial Stability Board. 16 April 2012.
- Wright, Chris (15 January 2018). "What China's new Basel standards will mean for banks". Euromoney.
- Chen, Kaiji (24 March 2016). "Unintended Consequences of Monetary and Regulatory Policies on Banks' Risk-Taking Behaviour: A Closer Examination of China's Shadow Banking". Centre for Economic Policy Research.
- Elliott, Douglas J. (31 March 2015). "Shadow Banking in China: A Primer" (PDF). Brookings.
- "How Shadow Banking Works". The Economist. 1 February 2016.
- Dang, Tri Vi (31 December 2015). "Shadow Banking Modes: The Chinese versus US System" (PDF). Columbia University.
- Wright, Chris (6 October 2016). "China's shadow monster can't be stopped". Euromoney.
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