Chapter 5: Regulating wealth management products
Shadow banking in China refers to lending that is free from the same regulation as bank loans, and includes banks’ off-balance-sheet vehicles such as commercial bills, entrusted loans, underground lending as well as wealth management products (WMPs). The WMP market is the major sector in which the banks are deeply involved in the shadow banking sector. Trusts and securities brokerages have emerged as new conduits for shadow lending. Due to tightly-controlled credit limits in China, part of China’s domestic deposits have steered from bank loans and savings into opaque, off-balance sheet, risk-laden vehicles or underground financial networks. The shadow banking sector has also reshaped China’s financial system, which used to be less complicated (compared to its counterparts in Western economies) though clumsy. Traditionally, the bulk of savings was deposited in the Big Four and other commercial banks, most of which are largely state-owned. Chinese banks have got used to extending most of their loans to state-owned enterprises (SOEs). When Chinese banks get into trouble, they will be bailed out by the government, eventually by the taxpayers and depositors. Now, savers can choose between traditional deposits and a variety of WMPs offered by lightly regulated trust companies and asset management firms as well as banks themselves. Borrowers therefore have access to a variety of flexible sources ranging from the bond market and trust companies (making entrusted loans via a bank) to kerbside creditors. According to Fitch’s statistics, traditional bank lending now only accounts for 55% of new financing, with the rest being supplied by the shadow banking sector.
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