Analysis On The Shadow Banking System In China And Its Development, Impact And Suggestions

Paul McCulley, the executive of PIMCO, has raised the word ‘Shadow BankingSystem’ on August2007for the first time. Later, this word became world famous inthe financial crisis. But regarding the definition of this word, the opinions are widelydivided. Five years later after the financial tsunami, this article proposes a definitionon the shadow banking system, based on the studying of the definitions given by thescholars both here and aboard, and make references to the definition for theInternational Shadow Banking System. The author proposes that the definition for theShadow Banking System within China should as follow: credit intermediary, mainlycommercial banking, take financial innovation activities, to avoid the regulations fromtheir headquarter or from their regulators, through maturity transformations, liquiditytransformations, credit risk transfer and leverage, in order to satisfy the needs frominvesting and financing, and to maximize their own liquidity and profitability. Theseactivities may threaten the safety of commercial banking or even the whole financialsystems; bring panic withdrawal, and result in systematic risks. The shadow bankingsystem has four characteristics: creativity, ambiguity, profitability, safety, andvariability.For the extended definition, the author thinks that the shadow banking system inChina should at least include the following six aspects:(1) wealth managementproducts offered by commercial banking;(2) products driven by the co-operationbetween trust companies and the commercial banking;(3) loan from entrust loans andpetty loan companies under the case that the fund is from commercial banking;(4) theproducts from trust companies, including collective trust plan and credit asset backedsecurities;(5) the products from fund companies, including mutual funds, privateequity, hedging fund and etc;(6) credit protection instrument, including credit risk mitigation products from insurance companies and financing secured companies. Ofall those instruments, wealth management products offered by commercial bankingand products driven by the co-operation between trust companies and the commercialbanking have the largest asset scale, and also the highest potential risks.After defining the shadow banking system, this article continues to analyze itsfeatures by distinguishing it from the traditional commercial banking, illustrate therun mode, and then analyze the main shadow banking products in China. Based on theanalyzed result, the author believes that the shadow banking system can generatePonzi scheme easily, and may lead to systematic or regional financial risks; but it alsofacilitate the liquidity, enhance the profitability, create various financial products,supplement credit intermediary, identify the asset price, satisfy the needs of theinvestors and financiers, and update the regulations. Hence, it is believed that weshould treat it reasonably, and pay attentions to the following three relationships: therelationship among profitability, liquidity and safety, the relationship betweenfinancial innovations and financial regulations, and the relationship betweentransmission and obscure.Finally, the author tides up the regulations announced by internal regulators onthe shadow banking system, and tries to evaluate the performance. Based on theexperiences gained from the performance appraisal, the author proposes the followingfour general guidance:(1) enforce the co-operations among all internal regulators, andprotect the consumers;(2) promote the functions of the credit intermediary, and try tosolve the financing issue and the investment issue;(3) establish risk warning andmonitoring policies;(4) insist on financial innovations; and the following threespecific suggestions:(1) classify the investors into3categories nationwide, and applydifferent information transmission rule and provision coverage ratio on differentcategory;(2) classify the investment products into5categories nationwide, and applydifferent provision coverage ratio on different category;(3) implement a new creditmanagement process and establish rules to separate front office, middle office andback office.