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January 16, 2014 at 08:20 PM
In a move surprising some analysts, China said it will allow the formation of up to five privately financed banks this year.
It also plans to focus more attention and regulation on its shadow banking sector. That, though by no means as significant as such sectors in other countries, has been growing at a rapid pace, in some years by as much as 50%.
According to the China Banking Regulatory Commission (CBRC), the new banks may be started from scratch, or may be existing banks restructured via private money, but they will “[bear] their own risks. Strict procedures and standards will be set for the pilots, with demanding setup criteria, limited licenses, enhanced supervision and a risk handling system,” according to the commission. It also said that it would look into making it easier for foreign banks to do business in the sector.
Private banks could be a way for China to boost competition in the sector and, it hopes, to spur growth. In addition, its concerns over the rise of shadow banking, along with soaring debt increases at local government levels, are spurring action to bring those institutions under closer scrutiny and control. Its banks have been ordered to publish their interbank liabilities, as well as their off-balance-sheet loans, in a nod to Basel Committee regulations issued last July.
Of the 19 Chinese banks that are publicly traded, the new orders apply to at least a dozen. Institutions whose assets amount to 1.6 trillion yuan ($264 billion) or more must publish 12 different indicators within four months of the end of each financial year, according to the CBRC. The indicators, which the CBRC said are not intended as evaluators of the banks’ risk levels or management, instead are to provide data on derivatives and cross-border assets and liabilities.
Banks also must provide additional disclosure on trusts and wealth management products; in addition, brokerages and their place in shadow banking will be supervised more closely.
The growth of shadow banking, which was estimated by JPMorgan at approximately 69% of 2012′s GDP, and the level of local government debt—which in less than three years has soared by 70% to nearly $3 trillion, 40% of which will be due by the end of this year—are causing Beijing to worry that the entire financial system’s stability could be jeopardized. However, Chinese leadership is by no means shutting down the shadow banking system; in its statement about changes to come, the CBRC said, “The emergence of shadow banks is an inevitable result of financial development and innovation. As a complement to the traditional banking system, shadow banks play a positive role in serving the real economy and enriching investment channels for ordinary citizens.”
This is perhaps not surprising when considering that only five years ago, China’s traditional banks dominated its financial sector, providing more than 90% of funding for the country’s economy. Now, however, those banks only account for 50%, with nontraditional (for China) institutions accounting for the rest.
