Central bank regulation backfires as shadow banking flourishes - SupChina

Central bank regulation backfires as shadow banking flourishes

The People’s Bank of China’s efforts to reduce debt in China’s economy may have increased financial risk overall. Bloomberg reports that “off-balance sheet lending,” the less-regulated type of loaning also known as shadow banking, “surged 754 billion yuan ($109 billion) in March, taking the first quarter’s total increase to a record 2.05 trillion yuan.”

The surge is a direct response to restrictions that the central bank put in place on financing through the closely regulated bond market, as “debt-reliant borrowers,” particularly real estate developers, hit a limit on how much they could borrow from large banks and turned to alternative forms of lending.

An illustration of the continuing risk in the financial system comes as at least 100 investors have collectively lost 3 billion yuan ($436 million) to fraud at a branch of Minsheng Bank in Beijing. Caixin reports that wealthy investors at the bank’s Hangtianqiao branch had been sold a wealth management product (WMP) without knowing it was unauthorized by Minsheng Bank’s headquarters. Furthermore, an internal company investigation revealed that the seal for a commercial acceptance bill for another loan had been faked.

Lucas Niewenhuis

Lucas Niewenhuis is an associate editor at SupChina who helps curate daily news and produce the company's newsletter, app, and website content. Previously, Lucas researched China-Africa relations at the Social Science Research Council and interned at the Council on Foreign Relations in New York. He has studied Chinese language and culture in Shanghai and Beijing, and is a graduate of the University of Michigan.