China’s financial risks could grow despite tougher regulations

Stronger government regulations could lead to investors shifting to the unregulated shadow banking sector

China’s financial risks could grow despite tougher regulations

Insurance News

By Gabriel Olano

China’s financial regulators have been taking multiple measures to reduce leverage in the financial sector, especially in assets funded by wealth management products, but this could lead to unintended consequences by increasing other shadow banking activities.

The country’s regulators have penalized at least 17 financial institutions for irregular operations, illegal transactions and improper fees. The China Insurance Regulatory Commission’s chairman was also removed from his post, the most senior official hit by the government crackdown.

According to a report by the South China Morning Post, China’s unregulated shadow banking sector is expanding, fuelled by assets funded by wealth management products, accounting for 47% of the sector’s revenue.

Data from Moody’s estimates that the shadow banking sector experienced 21% growth in 2016, reaching RMB 64.5 trillion (US$9.4 trillion), or almost 87% of GDP. However, this has actually slowed down from the 30% growth in 2015.

Tightening regulations in the legitimate financial sector could make traditional banking credit harder to access. This could lead to shifting financial sector composition, and may point to higher financial vulnerability.

“The interconnectedness between mid- and small-sized banks and the shadow banking sector continues to grow, increasing the risk that funding structures could become fragile if confronted with a negative liquidity shock,” said Michael Taylor, a managing director at Moody’s.

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