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products and dealing with the funds and profit associated with these. As well, it is primarily driven by domestic institutions, rather than foreign investments and entities, as is usual in shadow banking activity in other countries. In China, where banks are discouraged from lending to certain industries and are mandated to offer frustratingly low interest rates on deposits, non-banks fill the gap. About two-thirds of all lending in China by shadow banks are "bank loans in disguise". One of the controversies of this industry is that retail investors are largely unsure about what sorts of risks they are taking on when engaging in shadow banking. The connections between traditional banks and the shadow banking system further cloud the picture and at the same time contribute to increased risk.
205:
Bank Law of the PRC bans companies from loaning money to each other, again a documented reason as to why companies within China engage in shadow banking in the form of entrusted loans. In recent times, there have been several significant changes in
Chinese regulation with respect to shadow banking. These efforts have caused the Chinese shadow banking sector to shrink by approximately ¥16 trillion over since 2017. Chinese regulatory authorities have stated they remain committed to decreasing risk, limiting regulatory arbitrage, and opening up conventional capital lines to decrease shadow banking activity into the future.
109:
used by both private investors and corporations. In China, financial firms operate as trust companies, mainly though managing assets and investing for clients. The last decade of
Chinese regulatory action has attempted to slow the use of trusts by banks, as the funds raised through trust products are often channeled to riskier borrowers through trust loans. In 2012, the trust industry became the second largest sub-sector of China's financial industry, totalling over ¥7.47 trillion, which was cited as having grown to ¥12.48 trillion in June 2014.
100:
balance sheets, meaning they are not affected by deposit regulations. Their yield comes from the 'performance' or 'value' of assets upon which the product is built. They work through offering fixed rate return that is more profitable than traditional depositing. In China, some investors will expect the bank controlling their WMP to bear the credit risk associated with it. The number of WMPs throughout China has increased steadily in recent times, approximated to be, "less than ¥500 billion in 2004 to ¥9.5 trillion by the end of 2013."
214:
Reserve Ratio requirements are identified as one of the key reasons financial institutions engaged in shadow banking, in order to loan out money above the 75% cap, without these loans showing up on their balance sheets. The removal of the
Reserve Ratio requirement by the National People's Congress took effect in October 2015. This move was considered to be both an effort to stimulate economic growth and decrease shadow banking loans by freeing up banks to loan out the rest of their capital through conventional avenues.
32:
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any kind on the financing itself. This move ensured that the corporations themselves were required to bear the credit risk of entrusted loans. This came as a response to the associated risks of the rapid growth within this industry as a form of shadow banking. At the time, the amount of money in entrusted loans was identified to be ¥13.9 trillion. This move was also intended to push credit back to conventional financing channels such as on-book loans and bonds from financial institutions.
181:. Also, the Chinese Banking Regulatory Commission release opinions and notices on the law relating to shadow banking, including the Management Rules of Entrusted Loans of Commercial Banks and the Notice of the Chinese Banking Regulatory Commission on Printing and Distributing Administrative Measures for Commercial Bank Entrusted Loans. Internationally, China is a signatory to the
159:, in order to increase coordination between financial regulators and cover areas that the larger bodies could not. Internationally, China is a signatory to the FSB's Standing Committee on Supervisory and Regulatory Cooperation. Under the Law of the People's Republic of China, the People's Bank of China is given the power to implement
271:(LPR), which represents the average interest rate offered by a group of 18 banks in China. The loan prime rate is intended to serve as the benchmark for all lending. Dropping the LPR was identified as one of the methods for decreasing shadow banking activity, as it allows for more borrowers to access lines of capital.
176:
Chinese shadow banking is regulated by several domestic and international guidelines and pieces of legislation. The domestic law that legislates the practice and policing of shadow banking in China include the Law of the People's
Republic of China on the People's Bank of China and the Commercial Bank
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in 2007. It is documented that the growth in shadow banking activity was due to the inability of the traditional banking system to meet the spike in demand for funding, due to tight regulation on lending. It is estimated that in the period of 2010–2012, non-financial intermediaries in China grew at a
226:
in
November 2017 was an extra step towards increased oversight over shadow banking activity. As well, there was a significant push to deleverage the Chinese financial sector following the 19th Communist party in late October 2017. Specifically, the Central Bank issued new guidelines tightening rules
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Trust products refers to the category of financial products including trust loans, unlisted equity in companies and the trading of assets or capital packages. They designed and issued by, "non-bank financial institutions including trusts, brokers, insurance companies, and securities firms." They are
235:
In
October 2019, the Chinese government criminalised lending at an annualised interest rate of above 36%. This move targeted the shadow banking sector because being able to charge higher interest rates is one of the central reasons financial institutions opt to engage in off-book loans as a form of
204:
Within domestic regulation, there are several areas that are associated with shadow banking. For example, the PBC has control over interest rates within China, which is identified as one of the reasons for small to medium enterprises being unable to source funding in China. Moreover, the
Commercial
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Entrusted loans are loans between companies with a bank serving as the intermediary. The primary reason for entrusted loans is because
Chinese legislation has banned loans between companies. These loans operate on the assumption that the credit risk lies on whoever is lending in the arrangement. In
244:
In
January 2018, the China Banking Regulatory Commission tightened regulations on banks and other financial institutions arranging entrusted loans. These measures included stopping banks from participating in the decision-making behind the loan, as well as barring them from providing guarantees of
84:
Shadow banking in China involves several different forms of credit activity, some which include banks, and others which do not. In China, the most common forms of shadow banking include the use of Wealth
Management Products (WMPs), other trust products, entrusted loans as well as financial system
213:
The Reserve Ratio was a Chinese commercial banking law that stipulated banks could only lend a maximum of 75% of their capital deposits at any one time. This policy was adopted in 1995 and was designed to prevent rapid growth of commercial bank's credit scale in order to control liquidity risks.
75:
The Chinese shadow banking is distinct in that China has a bank-dominant financial system, and unique regulatory constraints on credit lending. This means there are more barriers to accessing lines of credit for Chinese businesses and individuals. Banks are also responsible for issuing financial
99:
Wealth management products (WMPs) are issues by banks, trusts, and securities firms and are financial products that have a higher monetary return than depositing your money in a bank. They are designed and sold by financial institutions as savings products but do not appear on the institution's
262:
We must spare no effort to improve monetary policy transmission and insist on market-oriented reforms to promote a noticeable decline in real interest rates...We should make flexible use of multiple monetary tools to maintain reasonably ample liquidity. At the same time, deepen interest rate
19:
Chinese shadow banking refers to underground financial activity that takes place outside of traditional banking regulations and systems. China has one of the largest shadow banking industries with approximately 40% of the country's outstanding loans tied up in shadow banking activities.
167:
and maintain stability in financial markets. The Chinese Banking Regulatory Commission and the Chinese Insurance Regulatory Commission are viewed to have supervisory roles over financial markets within China, rather than having legislative power.
126:
Alternative financing primarily relates to shadow banking activity involving smaller investments, and smaller, often rural investors and borrowers. It includes peer-to-peer lending, micro-financing, pawnshop financing, and financial leasing.
197:'s standards for commercial banks' large exposures. Specifically, this meant that banks' exposure to unidentified counter-party risk within the underlying assets of structured investments needed to be brought below 15% of the banks'
253:
In September 2019, the Central Bank of China announced their intention to decrease market interest rates in an effort to support economic growth within China. This is identified as being partially in response to the
118:
this sense, the loan ends up on the book of the banks, rather than on the books of the company. In 2013, the size of the entrusted loan industry was identified to be approximately ¥8.551 trillion.
72:
In the past, other reasons have been identified, including the reserve ratio requirement of 75% for banks loans to their deposits, and regulatory discouragement of lending to certain industries.
222:
In January 2018, the China Banking Regulatory Commission stated that it would be increasing its supervision of shadow banking and interbank activities. Furthermore, the establishment of the
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became the central bank in 1983. This encouraged commercial enterprises and private investors to place more of their money in financial products, causing the banking industry to grow.
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Shadow banking in China is identified to have first emerged in the late 1990s, however its rapid growth did not come until the period following the
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The People's Bank of China, which is one of the central bodies responsible for regulating shadow banking activity in China
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258:. A statement released by the monetary policy committee of the People's Bank at the time is quoted as saying:
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Some of the key reasons individuals and companies engage in shadow banking include, but are not limited to:
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which engages in setting standards and oversight for international regulation, most recently through the
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901:"The China Banking Regulatory Commission (CBRC) Issues Rules on Entrusted Loans | Hong Kong Lawyer"
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liberalisation, improve the loan prime rate regime and promote its use in practice.
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618:"The Law of the People's Republic of China on Banking Regulation and Supervision"
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549:"The Shadow Banking System of China and International Regulatory Cooperation"
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The main bodies responsible for regulating shadow banking in China include
823:"China to step up banking oversight in 'arduous' fight on financial risks"
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interlinkages such as transferring beneficiary rights for trust accounts.
590:"Members of Standing Committee on Supervisory and Regulatory Cooperation"
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a failure from regulators to limit the capacity for regulatory arbitrage;
873:"China criminalises loans with annual interest rates above 36 per cent"
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462:
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667:"China's Shadow Banking: Bank's Shadow and Traditional Shadow Banking"
463:"China's Shadow Banking: Bank's Shadow and Traditional Shadow Banking"
925:"China's entrusted loan ban to end popular form of shadow financing"
642:"Banking Laws and Regulations | China | Laws and Regulations | GLI"
955:"China's central bank eyes 'noticeable decline' in interest rates"
849:"China's date with real financial deleveraging will have to wait"
646:
GLI - Global Legal InsightsInternational legal business solutions
536:
https://bankandcredit.nbp.pl/content/2019/04/BIK_04_2019_02.pdf
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inter-bank interactions exclusion from credit management; and,
769:"China moves to regulate entrusted loans - Chinadaily.com.cn"
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published a draft regulation aiming to align China with the
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an insufficient supply of credit from the four major banks;
443:
Ehlers, Torsten; Kong, Steven; Zhu, Feng (February 2018).
445:"Mapping shadow banking in China: Structure and dynamics"
231:
Criminalising loans with annual interest rates above 36%
741:"Commercial Bank Law of the People's Republic of China"
512:"Asia banking: China's shadow monster can't be stopped"
727:"What China's new Basel standards will mean for banks"
420:
Bowman, Joel; Hack, Mark; Waring, Miles (March 2018).
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regulatory limitations around risky loans and finally;
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the Chinese government's control over interest rates.
394:"Regulatory responses to the Chinese shadow banking"
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Standing Committee of the National People's Congress
798:"China removes 75% cap on loan-to-deposit ratio"
570:"Financial Stability and Development Committee"
338:"Regulating the Shadow Banking System in China"
177:Law of the People's Republic of China from the
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224:Financial Stability and Development Committee
157:Financial Stability and Development Committee
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189:framework in 2017. In January 2018, the
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16:Overview of shadow banking in China
847:Magnus, George (24 January 2018).
267:This move involved decreasing the
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725:Wright, Chris (15 January 2018).
310:China 2019 - Shadow Banking Today
547:Liangsheng, Zheng (March 2015).
345:University of Chicago Law School
256:trade war with the United States
461:Sun, Guofeng (November 2019).
227:on asset management in China.
1:
422:"Non-bank Financing in China"
427:. Reserve Bank of Australia.
209:Removal of the Reserve Ratio
665:Sun, Guofeng (2019-11-08).
392:Łasak, Piotr (March 2016).
285:Financial services in China
240:Measures on Entrusted Loans
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480:"How shadow banking works"
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89:Wealth Management Products
95:Wealth management product
959:South China Morning Post
929:South China Morning Post
877:South China Morning Post
558:– via CIGI Online.
336:Lindgren, Megan (2018).
201:before the end of 2018.
80:Types of Shadow Banking
22:Shadow banking in China
682:Cite journal requires
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49:rate of 34% per year.
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26:People's Bank of China
773:www.chinadaily.com.cn
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249:Interest rate changes
153:Chinese State Council
122:Alternative Financing
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218:Increased oversight
163:, attempt to avoid
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706:ov.cn
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