Shadow banking might be on the way back - Sara Hsu

Sara Hsu

China's government has been trying to phase out shadow banking as a risky form of lending money. But now the country's economy is hit by a trade war, COVID-19 and other mischiefs, shadow banking might make a return, says financial analyst Sara Hsu at the East Asia Forum. 

Sara Hsu:

There are signs that this risk may be tolerated to some extent. Head of the China Banking and Insurance Regulatory Commission Guo Shuqing supported the crackdown on shadow banking but recently changed his tune and is allowing banks to increase their tolerance of bad debt during the coronavirus outbreak. Banks have also been directed to increase lending and extend repayment schedules in areas strongly affected by the coronavirus. At the beginning of February 2020, regulators granted a grace period for banks that are struggling to meet the tightest shadow banking rules. 

Shadow banking will be a double-edged sword for the Chinese economy. While it may temporarily give the economy the nudge it needs to maintain target GDP growth levels, granting permission to banks to lower lending standards is likely to result in the doubling of bad debts. It is a desperate measure fit for desperate times. 

Guo remarked before the coronavirus outbreak that China should continue to dismantle shadow banking by focussing particularly on high-risk shadow banking. This suggests that the industry will experience renewed suppression when the crisis is over. Shadow banking is unlikely to make a major comeback or to remain in vogue past the conclusion of the coronavirus pandemic. 

Shadow banking is one of the riskiest aspects of China’s financial system and has been subject to extensive regulation. Whether more shadow bank activity will be tolerated due to the coronavirus outbreak is yet to be seen. But a resurgence in shadow banking is unlikely to last.

More at the East Asia Forum.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more experts on the post-corona China? Do check out this list.  

The tough issue: shadow banking - Sara Hsu

Sara Hsu

Financial analyst Sara Hsu looks at the new  chairman of the China Banking Regulatory Commission (CBRC), Guo Shuqing, and the man he replaces, Shang Fulin. What has Shang done to deal with this murky financial sector, and can Guo do better, she wonders in Asia Times.

Sara Hsu:

Despite this long list of achievements, Shang has been criticized by some for not cracking down more on shadow banking. These criticisms are misplaced. For one, it was difficult to know in 2011 and 2012 how shadow banking would evolve, and regulations were focused on the greatest risks of that time. 

Most wealth management and trust products were on the rise, and the worst practices were only just materializing or had not yet come to pass. 

Second, some top officials were inclined to allow shadow banking activities to take place because of the boost they gave to the slowing economy of the time. 

For example, Governor of the PBOC, Zhou Xiaochuan, stated in 2012 that “shadow banking is inevitable when banks are developing their business … but there are fewer problems here than the shadow banking sector in some developed countries that have been hit by the global financial crisis.” 

Guo’s appointment indicates that China’s leadership is acutely aware of the financial risks that are building in the economy because of mounting debt and an increasingly unwieldy shadow banking sector. 

Real estate property bubbles, overcapacity in some sectors and supply-side reform are just a few of the challenges the government needs to tackle. As Guo stated on March 2, “we will put priority on financial risk control to make sure there won’t be any systemic financial risks.” Guo also noted that the banking sector controls business risks and it should “strengthen the sense of responsibility” toward these risks. 

What is not yet clear is how Guo will balance the need for growth with financial risks. But it is comforting to know that he has ample experience in implementing market-oriented financial reforms that dampen risk while creating room for economic activity. 

Still, the challenges are immense and only time will tell how Guo will balance these contradictions.

More in Asia Times.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.  

A new approach for shadow banking? - Sara Hsu

Sara Hsu

The appointment of Guo Shuqing as chairman of the China Banking Regulatory Commission (CBRC) raises expectation of a new approach of the shadow banking sector, says financial expert Sara Hsu in the East Asia Forum. 

Sara Hsu:

Guo’s appointment indicates that China’s leadership is acutely aware of the financial risks that are building in the economy because of mounting debt and an increasingly unwieldy shadow banking sector. Real estate property bubbles, overcapacity in some sectors and supply-side reform are just a few of the challenges the government needs to tackle. As Guo stated on 2 March, ‘we will put priority on financial risk control to make sure there won’t be any systemic financial risks’. Guo also noted that the banking sector controls business risks and it should ‘strengthen the sense of responsibility’ toward these risks. 

What is not yet clear is how Guo will balance the need for growth with financial risks. But it is comforting to know that he has ample experience in implementing market-oriented financial reforms that dampen risk while creating room for economic activity. Still, the challenges are immense and only time will tell how Guo will balance these contradictions.

More in the East Asia Forum.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.