Illumination alone won’t slow China shadow banks
By John Foley
(The author is a Reuters Breakingviews columnist. The opinionsÂ expressed are his own)
When it comes to Chinaâs shadow banks, switching on the lights isnât enough to make the risks go away. The countryâs lenders may soon be asked to disclose their off-balance sheet lending activities, starting with a trial in Shanghai, according to the Financial Times.
The watchdogâs task is not an enviable one. The China Banking Regulatory Commissionâs job is to make sure banks are safe without killing off financial innovation. In practice that has led to a kind of cat-and-mouse game. The CBRC issues broad principles, but then introduces specific rules when activity gets to a certain scale. One example is its ban on banks pooling their wealth management products. That should prevent them from repaying investors in one product with the cash raised from another – effectively a Ponzi scheme. Yet some banks are still exploiting loopholes.
The regulatorâs other idea of capping issuance of wealth management products at 20 percent of a bankâs deposit base is also wise. Some banks may already be far beyond that threshold. Bank of Beijing and Bank of Communications have been particularly active issuers of wealth management products, Fitch Ratings warned in December.
Based on the CBRCâs estimates, off-balance sheet products issued by banks accounted for 7.8 percent of total deposits at the end of 2012. So the new rules would still leave room for system-wide issuance to more than double. They also wouldnât stop products from getting into trouble – recent near-failures at Huaxia Bank and CITIC Trust didnât lack for documentation. Nor do the rules help clarify what should happen when things go wrong. In theory, investors should be prepared to shoulder defaults, but they havenât so far.
Shadow banking is part of Chinaâs broader boom in non-bank lending: the stock of outstanding loans reached 44 percent of GDP in 2012, according to Credit Suisse, and accounted for half of the total financing of Chinaâs economy in January. Keeping that credit flowing is pre-eminent for the countryâs leaders as they attempt to keep the economy expanding. It wonât just be up to bank regulators to decide whether shadow banking has a happy ending.