China gets tougher on shadow banking

New rules intend to slow explosive growth of the gray market.

China’s shadow banking system has quadrupled in size since 2008 to about US$3.2 trillion or 40% of China’s total economic output.

China intends to exert more control over the shadow banking system by requiring banks to provide greater disclosure about their off-balance sheet activities. The new regulations could lead to a slowdown in the huge growth of the shadow banking by making it tougher for banks to funnel deposits into off-balance sheet vehicles such as wealth management products or WMPs.

Analysts said this move reflects a consensus among policymakers that credit flows outside the banking system are a healthy development for China as long as they are monitored and kept in check.

The disclosure requirements will begin as a trial in Shanghai in late March or early April. Banks will be asked to register their WMPs with the local regulator. WMPs are deposit-like instruments that offer higher yields and are mostly held off-balance sheet.

WMPs amount to 10% of total deposits in the Chinese banking system and this compares to their being virtually non-existent three years ago. Smaller banks have been particularly aggressive in issuing WMPs to draw new customers, and several are already near the 20% mark.