China Herald: Why the issue of shadow banking is fading away

Sara Hsu

Shadow banking was one of those China issues that kept financial people awake at night. But after a decade of studying shadow banking, Sara Hsu argues in Triple Crisis that the issue has been cut up in manageable parts, and will fade away by 2015.

Sara Hsu:

Financial reforms, many of which are expected to begin this year, will also reduce the size of the shadow banking sector. Elimination of deposit rate ceilings, coupled with deposit insurance, will allow depositors to earn more interest on and have more confidence in their bank deposits, and will likely act as a deterrent to demand for higher yielding but riskier shadow banking products. A more market-based system will allow traditional financial channels to compete with shadowy finance.

Finally, as a crisis of economic confidence is provoked—and we have already seen signs of this in the real estate sector—consumers will look to keep their assets safe. They will put their money in bank deposits, keep it in real estate (although they will likely not buy more housing), lend money to their friends for real business transactions, and buy gold or jade jewelry. It is highly unlikely that they will continue to purchase wealth management and trust products that have already shown indications of deterioration, and even less likely that they will lend to companies that already have scarred images, such as credit guarantee companies. The “animal spirits” that played such a large role in creating the shadow banking boom are reversing, and can be depended on to greatly reduce the size of the sector in the coming bust.

I predict, then, that by this time in 2015, shadow banking in China as we know it will be something else, and this buzzword will no longer abound on the mouths of babes. Trust companies will be freshly disciplined and the myriad types of shadow banking entities that exist today will be fewer in number. The financial sector will continue to contain the formal banking sector and many non-bank financial institutions, but the latter will soon be forced to become braver, and less shadowy, than they have been at their commanding height. What a difference a year may make.

More in Triple Crisis.

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