Clamping down on China's shadow banking
China’s central bank, The People’s Bank of China, is to establish a new statistics platform to measure all financial activity, from leveraged securities investment to local government borrowing. The data bank is a key development in a campaign to clean up China’s $15 trillion shadow banking system and control financial risk. Shadow banking comprises financial instruments that fulfil functions of credit intermediation typically performed by banks but reduces regulatory burden bypassing banking rules.
China is seeking to prevent a recurrence of the 2015 stock market meltdown, which reputedly destroyed US$5 trillion of wealth in three weeks and damaged Beijing’s economic reputation because China’s banking and securities watchdog didn’t know how the amount of “leveraged funds” entering the market. The central bank says the new database will provide greater transparency of fund flows in asset management products, systemically important financial institutions and the securities, banking and insurance sectors. A lack of reliable data was blamed for policymakers’ inability to detect the warning signs in 2015, as they focused solely on actors within the agencies’ respective regulatory scope.
The recent reshuffling of China’s regulatory administration merged the country’s banking and insurance regulators. The Financial Stability and Development Commission, a new super financial regulator believed to be headed by vice-premier Liu He, was formed at the order of President Xi Jinping to supervise monetary policy and financial regulation in China. The central bank also initiated what it called a macro prudential assessment tool to eliminate systematic risk, and was designated the body responsible for making rules and setting development guidelines for China’s financial industry.