A crackdown on China’s £7.3 trillion ‘shadow banking’ industry is rattling markets

Guo Shuqing, China’s newly appointed banking regulator, attends a news conference ahead of China’s parliament in Beijing, March 2, 2017.Reuters / Shu Zhang

LONDON — A crackdown on China’s “shadow banking” industry is rattling share prices and bond markets, according to an FT report.

Shadow banking is broadly defined as financial activities such as lending which are conducted in unregulated conditions, and it’s a massive deal in China: Business expanded to around £7.33 trillion ($9.4 trillion) a year in China last year, according to ratings agency Moody’s.

But the practice exposes the country’s economy to a huge amount of financial risk, and it has come under much more scrutiny from China’s newly-appointed banking regulator, Guo Shuqing, who has signalled his intention curb off-sheet lending.

Since his appointment in February, he has introduced rules to discourage banks from using borrowed money to invest in bonds, which in turn has pushed bond yields to two-year highs and wiped £29.5 billion ($38 billion) from the share prices of Chinese banks.

Moody’s downgraded China’s sovereign ratings last week, saying it expects the world’s second-largest economy to erode as its debt rises and growth slows — and the problem of shadow banking was cited as a specific problem.

“If in the future China’s structural reforms can prevent its leverage from rising more effectively without increasing risks in the banking and shadow banking sector, then it will have a positive impact on China’s rating,” Li Xiujun, vice president of credit strategy and standards at the ratings agency, said.