Shadow Banking Activities in the P.R.C.

It's the economy, stupid~

Factors leading to this happened

  • Insufficient supply of credit from four major banks (during the high-speed China’s economic development era)
  • Limited regulations over risky loans
  • Limited regulations over arbitrage
  • Inter-bank interactions exclusion from credit management
  • Chinese government’s control over interest rates
  • Criteria of promotion for the local government leaders
  • Others
    • Regulatory discouragement of lending money to certain industries 

Additional risks

About two-thirds of all lending in China by shadow banks are “bank loans in disguise”.[7] One of the controversies of this industry is that retail investors are largely unsure about what sorts of risks they are taking on when engaging in shadow banking.[8] The connections between traditional banks and the shadow banking system further cloud the picture and at the same time contribute to increased risk.[9]

Methods in detailed

  • Wealth Management Products(WMPs), aka. 理财产品
    • Why people would invest it? And what’re its risks?
      • Compared to deposit, it can offer higher return.
      • Although people invest, they usually don’t know what exact portfolio would financial institutions invest, as well as banks usually wouldn’t like to tell them. Moreover, some of products cannot even ensure investors’ principles, which put huge risks on investors. 
    • How can it bypass regulations? Or, how can this shadow banking activities do not appear on banks’ balance sheet?
      • Their yield comes from the ‘performance’ or ‘value’ of assets upon which the product is built. These financial products designed and sold by financial institutions, like banks, trusts and securities firms, do not appear on the institutions’ balance sheet.
      • Ostensibly, banks act like an intermediaries rather than actual holders, which gives them reasonable pretexts that they don’t show this shadow banking activities on balance sheet.
    • How’s the situation in US? And why doesn’t Chinese government legislate it to force it to appear on the banks’ balance sheets?
      • Issuing a WMP is strictly regulated in US, through several regulatory bodies, while, although such products do have some regulation to some extent in the PRC historically, they’re loosely regulated, which makes evasion from regulation possible and rampant. For now, the central government has made more significant efforts to regulate WMPs and shadow banking.
      • Although Chinese government, including its highest leaders, is aware of this situation, even the central government does not know the exact amount of number of WMPs. Secondly, considering the officials’ criteria of promotion within the CCP system, historically, local government would try their best to maximize leveraging, and the central government also knows this, but considering the fast development needs and how the authoritarianism system works, both local and central government historically didn’t have such willingness to regulate it.
      • As for now, the amount of number is enormously large, which is really a big problem and several serious results have risen up. Recognition of central government about this serious issue makes central government to have strong willingness to regulate, but, as for the local government, the criteria of promotion remains similar. The easier ways to achieve the economic development, aka GDP numbers in CCP’s criteria system, is still to leverage, resulting in local governments to have less willingness to regulate this. Although considering the pyramid system within the CCP, sometimes local governments have to follow the instructions from higher leadership, while, it’s still clear to say the local governments don’t  have such stimulus to regulate. If such situation were not to be changed, we will still see huge investment from the local government, such as infrastructure investment.
      • Hypothetically, If the central government were to force banks to include the WMPs on their balance sheets immediately, several negative and serious economic results would occur, such as bank runs, bankruptcies, economic instability. This creates a dilemma: forcing banks to include them on balance sheet would cause problems, while, maintaining the status quo would also lead to problems eventually.
    • The number of WMPs
      • Its number has been increasing steadily, with it increasing from less than ¥500 billion in 2004 to ¥9.5 trillion by the end of 2013. 
  • Trust Products
  • Entrusted Loans
  • Alternative Financing
  • Interbank Market Activities
  • LGFVs
  • P2P
  • ……


Shadow banking in China

How China Works: An Introduction to China’s State-led Economic Development

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ts, tssblog's owner, a.k.a. Lucas
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