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PBOC Shines Light on Risks in $8 Trillion Shadow Loan Market

Updated on
  • Shadow banking grew 30% last year to equal four-fifths of GDP
  • Macquarie: Central bank wants ‘to have the situation in hand’

China’s central bank is expanding the fight to monitor and control risks emerging in the burgeoning market for loosely-regulated shadow lending.

The People’s Bank of China has started collecting data from the murky world of online financing, in which firms make loans for everything from weddings to mining projects. It’s a growing part of a shadow banking market that ballooned 30 percent last year to 53 trillion yuan ($8.1 trillion), or four-fifths the size of the economy, Moody’s Investors Service data show. The PBOC also wants to make trading in some commercial loans transparent by building an exchange for transactions, according to local media reports.

The PBOC has switched gears from stimulating growth in an easing cycle that started late 2014 to clamping down on the financial and debt risks that threaten to derail a tenuous stabilization in the world’s second-largest economy. The monetary authority is taking on an expanded role among watchdogs as top leaders plan an overhaul of the nation’s regulatory structure.

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"The central bank feels the urgency to improve oversight," said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. "Online financing remains in the shadows, but an increasing number of the public who are more vulnerable to defaults than institutional investors are joining for the sake of high returns."

More than 90 percent of China’s almost 4,000 lending platforms promised their 2.9 million investors annual returns ranging from 8 percent to 24 percent in March, according to Yingcan Group, which tracks the data.

The central bank plans to set standards for identifying hidden risks and publish the findings, Sheng Songcheng, head of the PBOC’s statistics department, wrote last week in China Finance, a magazine it publishes. He said monitoring began in early May, with an emphasis on tracking how loans are used, but the PBOC still needs to work out legal issues with the National Bureau of Statistics to legally collect some data.

"Risks have also emerged because of the relatively loose regulations," Yu Xiangrong, an economist at China International Capital Corp. in Hong Kong, wrote in a recent note, citing reports of Ponzi schemes and operators disappearing with investor money. "We expect China to step up its efforts to address the risks associated with internet finance and to tighten regulations on fundraising, loan-pricing, lending and risk controls."

For a look at other recent expansions of the PBOC’s oversight, click here.

The PBOC has been leading the government’s investigation into the hidden risks in peer-to-peer lending, according to Zhang Lei, vice president of Yinker Group, a Beijing-based online financing platform. Starting in May, such companies in Beijing are required to release information such as how loans are used, and if funds are overseen by a third party.

"There was little supervision in the industry," Zhang said. "The government is taking the time to observe and understand what it’s about."

Regulators feel growing need to be vigilant about such risks because increasingly interconnected financial markets mean defaults in one market can easily be passed on to others, according to Lu Ting, chief economist at Hua Tai Securities Co. in Shanghai.

"The central bank wants to be on top of these new developments to fill in the regulatory vacuum, which has been exposed in several scandals," Lu said. "When an online financing project defaults, it can lead to a trust crisis among retail investors who, in turn, are likely to redeem the funds in other products and cause liquidity squeeze."

The PBOC also is discussing with banks the creation of an exchange for bills financing, the 21st Century Business Herald reported last week, citing unidentified industry participants. The market, also known as bankers’ acceptance, is an archaic part of China’s banking system meant to provide short-term funding to companies.

The $788 billion market, which PBOC data show has more than doubled in size over two years, has pitfalls: Because some 80 percent of transactions are recorded on paper rather than electronically, fraud has been common and illicit proceeds have often been invested in stocks or real estate.

Xu Zhong, deputy director of the PBOC’s financial markets department, will lead the Shanghai-based exchange, Caixin reported last week, citing people familiar with the matter it didn’t identify.

The PBOC didn’t respond to a faxed request for comment sent Monday on the new data gathering methods or the reports of the exchange proposals and Xu’s appointment.

"What the central bank wants is just to have the situation in hand," said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong, who says rising defaults are a top risk this year. It wants an integrated oversight framework, "but it doesn’t necessarily mean the PBOC is tightening up the regulation on these financial innovations."

Online financing includes peer-to-peer lending, in which individuals and companies borrow from other people or firms through websites, mobile apps or even storefront businesses that facilitate the lending. Individuals might use the cash for anything from buying a computer or car to paying for a vacation or tuition, while companies may borrow to make bets in markets for stocks or commodities or wagering on property prices.

"Supervision responsibility for these areas wasn’t clearly defined in the past among regulators," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. "It’s a wise step for the central bank to take on these duties."

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— With assistance by Yinan Zhao

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