China's New Watchdog to Tackle Shadow Banking, Property Bubbles

  • Wealth-management products now exceed $4 trillion, CBRC says
  • Guo hopes to ‘expose the financing hidden in the shadows’

China’s banking regulator outlined wide-ranging efforts to rein in financial risks, including clamping down on shadow lending and curbing funding for property speculation.

Guo Shuqing, three days on the job as chairman of the China Banking Regulatory Commission, said he will coordinate with other financial authorities, including the central bank, to plug loopholes in regulations for cross-market financial products and update rules that no longer fit with banks’ current business and risk management.

“Banks, trusts, fund-management firms, brokerages and insurers all have asset-management operations, but because they have different regulators and are subject to different rules, there’s been some chaos,” Guo said at a press briefing with his deputies in Beijing Thursday. Having one set of rules for asset-management products would enable each regulator to “set higher standards” as well as “improve transparency and expose the financing hidden in the shadows.”

At the same time, Guo dismissed speculation that he may lead efforts to revamp the nation’s financial regulators, calling it a “rumor.”

Read more on the challenges facing China’s banking regulator

The CBRC, the central bank, and the securities and insurance regulators are working more closely to curtail risks from the nation’s shadow-banking sector, a move that Moody’s Investors Service says would be credit-positive for banks. Previous efforts from individual authorities created opportunities for regulatory arbitrage, the ratings company said Feb. 27.

WMP Rules

In addition to the joint rules, the banking regulator is drafting a separate regulation on banks’ wealth-management products, CBRC Vice Chairman Cao Yu said at the briefing. WMPs, which promise higher returns than deposits and are viewed by many investors as a form of risk-free savings, surged to 29.1 trillion yuan ($4.2 trillion) as of Dec. 31, Cao said.

Find out more about China’s WMPs

The surge in WMPs, mostly issued by lenders, has accounted for a significant proportion of the expansion in shadow banking in China, leading the central bank to start including the products in its macro-prudential assessment framework this quarter to better gauge credit growth and potential financial-system risks.

Out of Shadows

The CBRC also plans to require banks to move more shadow business onto their books as some lenders’ off-balance sheet assets have outgrown those accounted for on their financial statements.

“It’s not that we are against diversified business at banks, but we should focus more on their risks,” Wang Zhaoxing, another vice chairman of the CBRC, said at the briefing. The regulator wants to ensure that bank credit goes to the real economy and lenders make adequate provisions against potential risks, he said.

Meanwhile, Guo said the CBRC is paying close attention to real estate bubbles as 45 percent of the nation’s new loans last year went to the property sector, with most going to personal mortgages. Even as the overall leverage for Chinese households was “not high,” the fast growth in their borrowing over the last two years is worth monitoring, Guo said.

A QuickTake explainer on shadow banking

Guo, 60, was appointed the CBRC’s head last month after serving as governor of eastern Shandong province since 2013. He spent much of his professional life working on the transformation of the country’s financial system in his former roles as chairman of the China Securities Regulatory Commission and of China Construction Bank Corp. and head of the State Administration of Foreign Exchange.

He inherits oversight of an industry where earnings have sputtered in recent years amid surging provisions for bad loans and shrinking lending margins. State lenders have announced about 430 billion yuan of debt-to-equity swaps to help alleviate borrowers’ financing burden so far, Guo said, adding that a market-oriented model is a sustainable way to lower corporate leverage.

— With assistance by Jun Luo, and Dingmin Zhang

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