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.  

Is shadow banking back in grace? - Sara Hsu

Sara Hsu

After a lengthy crackdown on shadow banking, this risky financial tool seems to be back in grace as China's economy is slowing down. It is the pragmatic way China's financial authorities deal with the economy, financial analyst Sara Hsu says. Shadow banking will be allowed, as long as it works, she writes in China Focus.

Sara Hsu:

Of the major shadow banking sectors, the trust industry appears to be the most suited for endorsement, and the other sectors do not. Asset management products, entrusted loans, and internet finance are still pretty risky. While they do provide funds to businesses that would otherwise not be able to obtain them, and returns to investors who have few viable alternatives, these areas are prone to risks solely due to their nature. For example, in the case of entrusted loans, in which businesses lend to other businesses, the ease of investing in risky ventures remains problematic. In the case of P2P lending companies, the lure of setting up a platform without providing sufficient credit checks is pretty strong. Finally, in the case of asset management, especially wealth management, products, major precedent has been set in the past eight years or so to create attractive returns based on opaque and super risky underlying assets. 

While the trust industry is not perfect by any means, it does serve the real economy to some extent. This sector also has regulatory support behind it. The China Banking and Insurance Regulatory Commission stated in 2018 that, “trust companies to transform from high-speed growth to high-quality development and to vigorously support the development of the real economy." The CBIRC has stepped up monitoring and policy guidance of the sector. 

So, while shadow banking on the whole remains too risky to fully legitimize as a reliable form of finance for China’s economy, there is one aspect that, under strong supervision, may provide a pressure valve for financing needs that banks cannot fully satisfy. Trust companies may prove to be worthy of regulators’ efforts to improve their practices. As we have seen, however, this not guaranteed.

More in China Focus.

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.  

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.  

And the real estate bubble persists - Sara Hsu

Sara Hsu

Efforts by China´s financial authorities to tame its real estate sector failed, mostly because China´s investors have few venues to make money, says shadow banking expert Sara Hsu in the EastAsia Forum.

Sara Hsu:

Government involvement in the shadow banking sector is unclear. In the past, authorities have bailed out failed products such as WMPs, but bailouts are far from guaranteed. Neither is the enforcement of interest, as illustrated by a recent case where New China Trust — in an attempt to recover equity investment from a real estate developer — lost a lawsuit. The equity investment was viewed by industry experts as a loan, since it contained a stock repurchase agreement. But the courts did not support this understanding. Inconsistent bailouts and insufficient support for shadow banking interests renders investment in this sector risky and uncertain. 

But a lack of alternatives has made the shadow banking sector a go-to resource for borrowers and investors alike. The stock market volatility that rocked China in June 2015 still resonates and investment in stocks has not fully recovered from the freefall that took place as the asset price bubble burst. Bond markets are shallow and corporate bonds tend to be overrated. The banking sector is associated with low returns on deposits and is also constrained in lending — it continues to prefer state-owned and larger firm borrowers at the expense of private and smaller firm borrowers. 

China’s efforts to liberalise its financial sector and further open up to market forces have been marginally successful but insufficient in the face of increasing demand for returns and loanable funds. Firms and residents are increasingly financially savvy and wish to reap returns on their savings, but this is especially tough in an economy where interest rates and risk ratings do not always reflect real alpha and beta. As a result, we can expect to see asset price bubbles recur. The shadow banking sector will continue to grow in a climate that is failing to integrate market forces into financial products.

More in the EastAsia 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.  

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China´s finance, between bears and bulls - Sara Hsu

+Sara Hsu 

Last year China promised it would not bail out its unruly financial sector. It still did. It promised swiping financial reforms. They did not materialize. Financial analyst Sara Hsu discusses the current state of China´s finance and what the government should do. Asking questions are Chao Pan and Fons Tuinstra.

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 interested in more financial experts at the China Speakers Bureau? Check out our recent list.
 

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The party is over for Chinese banks - Sara Hsu

Sara Hsu

The party is over for Chinese banks, shadow banking expert +Sara Hsu concluded (together with co-author Andrew Collier) at the EastAsiaForum.com. Regulator can no longer turn a blind eye, as loans put local governments and private lenders into trouble.

+Sara Hsu:

The party is over for Chinese banks, who have for the last few years enjoyed record profits. Since the end of 2008, the Chinese leadership’s desperate bid to keep the wheels of growth turning has let a flood of credit into the banking system and led to an unprecedented US$6.2 trillion of bank loans to state-owned companies and local governments.
Many of these loans bypassed the banks’ books entirely, going through the so-called ‘shadow banking’ market made up of everything from giant financial trusts to mum and dad mini-banks. After a while, even the state banks joined the game. While the regulators turned a blind eye, the four state banks and the smaller city banks took customer deposits, wrapped them into neat little financial tools called  ‘wealth management products’, and sold them on to eager buyers. These included wealthy people chasing yield, real estate developers signing property deals, and even importers short of ready credit.
This explosion into new markets was a change for the state banks. Up until 2010 they had ‘toed the line’, making loans to safe borrowers such as state firms, and following strict rules on interest rates. But a tug of war was going on in the upper levels between more conservative elements such as the People’s Bank of China (PBOC), which was worried about risky loans, and the more aggressive politicians in the State Council, who feared an economic slowdown. In the end — at least until recently — the spenders won out.

More at the EastAsiaForum. 

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.

China Weekly Hangout

Is China going to collapse under the burden of its debts? Yes, if they do not play their cards rights, tells Sara Hsu, leading expert on shadow banking in China during the +China Weekly Hangout on August 30. Questions are asked by +Fons Tuinstra of the China Speakers Bureau.


Who is doing due diligence on the due diligence firms is a question the +China Weekly Hangout asked after Shanghai-based Peter Humphrey and his wife were arrested for running an illegal operation in China. No date has been set yet, but when you follow our Google+ business page, you will get notified.

The bubble of shadow banking in China - Sara Hsu

Sara Hsu

Shadow banking covers about 25% of China's financial industry, and poses a threat to the country's future. Shadow banking expert Sara Hsu fears that these riskier ways of getting finance, shadow banking might collapse and wipe away the savings of many Chinese, if the government does not step in, she tells at the +China Weekly Hangout. 

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.  China Weekly Hangout  

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