Taming expansion of lending by shadow credit system is key to China’s economic reforms

By Xiao Xin Source:Global Times Published: 2017/7/19 21:18:39

While new estimates from Swiss bank UBS point to weakening shadow lending activities amid supervisory tightening in China, concerns over massive amounts of shadow credit are keeping market observers on edge as they fear a shadow banking implosion.

For there to be sustained confidence in China's economic stability, the country must be resolute and unwavering in its efforts to curb shadow banking risks. The results of such efforts will play a decisive role in guarding the country against systemic financial risks.

China's total social financing (TSF), which measures the broad level of credit and liquidity in the economy, doesn't cover all shadow credit activities. For example, some shadow credit extended via nonbank financial institutions is missing from the full credit and debt picture, according to a recent UBS report.

Still, the availability of more details on lending activities has led the bank to revise its estimate of "missing" shadow credit down to the level of as much as 16.8 trillion yuan ($2.49 trillion), equivalent to 11 percent of outstanding TSF. The previous estimate was 22 trillion yuan.

The incomplete figures on TSF dampen market sentiment that would otherwise be lifted by signs of softening shadow credit in light of China's ongoing tightening of regulatory oversight. The gigantic shadow credit overhang can be a time bomb if not dealt with in a timely and effective manner.

Admittedly, there are worries about the impact of supervisory tightening on the country's financial innovation, notably in the world of fintech, considering that rapid innovation in the financial sector is seen intertwining with the rise of shadow credit that plagues the Chinese economy. But that should by no means be an excuse for further shadow lending indulgence.

These could easily turn into a nightmare for the Chinese economy if allowed to run their course without hindrance. China can hardly make great breakthroughs in economic reforms if it fails to tame rampant debt.

There shouldn't be any doubt that stability comes before innovation if something has to be sacrificed. Market watchers are gratified to see the country is moving in this direction, with the newly announced financial stability commission expected to address the issue of regulatory arbitrage, which has been blamed in part for shadow credit growth. The commission's responsibilities include making financial reform plans, coordinating financial policies to enable regulatory synergy, drafting rules to fill regulatory gaps, and holding officials accountable for inadequate regulation.

This surely means concrete steps are in the pipeline to not only continue the regulatory tightening, but more importantly to permit more effective and efficient oversight of shadow loans, among other financial activities.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn


blog comments powered by Disqus