China Shadow Banking Issues Reviewed by China's Economy & Policy-Gateway International Group17 Aug 2012 • by Natalie Aster
The shadow banking systems of the United States and other countries have been affected by and in many ways blamed for the recent financial crisis. The Financial Stability Board (FSB) has issued a proposal for regulating the shadow banking systems in its member countries. As a result, China’s shadow banking system has become a sensitive topic that requires further examination.
The report “Shadow Banking in China” by China's Economy & Policy-Gateway International Group attempts to analyze the state of the shadow banking system in this country.
According to the report, from the narrow perspective of financial innovation, the shadow banking system (SBS) in China mainly refers to the off-balance sheet securitization activities of banks. From the broader perspective of duplicating the core functions of commercial banks, the system is also engaged in legal and illegal non-bank credit allocations. These institutions are not qualified to accept deposits, and have widely diversified funding sources, but they grant loans and create credit through bank or non-bank channels.
Shadow Banking in China
Published: May, 2012
Price: US$ 200,00
Legitimate non-bank credit includes entrusted loans from listed companies or individuals, trust loans, loans from small loan companies, pawnshop loans, network loans, and loans from consumer finance companies. This non-bank credit is currently subject to regulation, but the regulations are not as strict as those for the banking system.
1. Entrusted loans. Entrusted loans are a form of credit where a client provides funds which have legitimate sources, and entrusts the banks to grant, supervise, and withdraw according to criteria and requirements set by the client related to the borrower, purpose, amount, duration, and interest rate. The client may include government departments, enterprises, institutions, and individuals. These loans are equivalent to funds which are lent between enterprises, but because the transfer of funds between different legal entities in the absence of actual trading activities is banned in the General Rules on Loans, the exchange of funds between enterprises can only take the form of entrusted loans.
2. Trust loans. These include direct and indirect trust loans. According to the Procedures on the Administration of Trust Companies, a trust company can lend entrusted funds to enterprises according to the desires of the clients. Direct trust loans are in line with regulatory provisions for trust companies, but they can serve to expand the total amount of loans when bank loans are tightened, so they can be considered as a supplement to bank loans, and can fundamentally weaken the ability.
More information can be found in the report “Shadow Banking in China” by China's Economy & Policy-Gateway International Group.
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