Euromoney, January 15 2018
China’s latest effort to curb shadow banking involves applying Basel standards on banks: they must disclose far more of their exposure to previously unidentified counterparties. it’s good for the industry, but what does it mean for individual mainland banks?
Shadow banking has long been the ghost at the feast of Chinese banking. Mainland banks lead the world in market capitalization these days and their growth trajectory is promising, but the entire system’s outlook is clouded by this opaque sector.
Shadow banking has dodged regulation so extravagantly that it has at times been worth as much as 87% of China’s GDP: Nomura has estimated the sector as being worth RMB122.8 trillion ($18.5 trillion).
It was with this in mind that the China Banking Regulatory Commission (CBRC) published a draft regulation in January, in a move that would bring the country in line with the Basel Committee on Banking Supervision’s framework for controlling large exposures of commercial banks.
It was one of a suite of measures and directives the CBRC launched in January to try to rein in a practice that threatens the structural integrity of the whole banking system.
The regulation is at the comment stage – so it’s possible it won’t be adopted – but generally when China issues such a draft, it’s pretty much committed to going ahead with it.
“There is always a public comment stage,” says one banker familiar with the process of new regulation in China. “And it is true that you can make suggestions on the detail. But when a draft is out there, you know the essence of it will be law soon no matter what you think of it.”
Before analyzing the draft, let’s look at the problem it is attempting to tackle.