The tough issue: shadow banking – Sara Hsu

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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.

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