China's State Council publishes guidelines to strengthen shadow banking regulation-report

By Nicel Jane Avellana

Jan 06, 2014 08:03 AM EST

The State Council of China has published guidelines geared towards strengthening the regulation against risky shadow banking in a bid to address the rising financial risks that come with growing demand for debt, Reuters reported. The guidelines urged for stricter regulation of off-balance-sheet lending by banks. It also said that trust companies, considered as the largest non-bank players in the shadow banking industry, should go back to their original role as asset managers and not take part in "credit-type" businesses.

Reuters reported that it got a copy of State Council's Document 107 which was dated December 11. The document was addressed to government agencies at the central and local levels but Reuters said no official confirmation of the document has been given.

Reuters reported that on Monday, January 6, an index of the biggest stocks in the mainland closed at its lowest level in five months due to concerns over the new guidelines.

Chinese policymakers are worried that the country's economy has relied heavily on borrowing to drive growth which has resulted to huge overcapacity in a lot of industries. If the regulations get strictly implemented, it would be able to reduce the risk of a bad-debt crisis and put the Chinese economy towards a more stable long-term path. However, the implementation could also cause short-term growth to decline since lowered credit growth would also prompt a drop in spending, the report said.

Talking about the Chinese central bank's measure of total credit which was taken from all sources, Liu Yuhui told Reuters, "One can predict that growth of total social financing will slow and fixed-asset investment will also slow. If this isn't accompanied by various forms of debt restructuring, some sectors may see their funding chains broken and there could be defaults." Liu is the director of the financial focal point laboratory at a government think tank called the Chinese Academy of Social Sciences.

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