, China

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.