According to a report from the Wall Street Journal, "China's move to step up regulation of its shadow-banking system highlights the weakness of its financial regulators.
The inability of China's securities and banking watchdogs to limit the growth of lending outside traditional banks contrasts with the country's central bank, which has emerged as the main bulwark against shadow banking".
The inability of China's securities and banking watchdogs to limit the growth of lending outside traditional banks contrasts with the country's central bank, which has emerged as the main bulwark against shadow banking".
The central bank, known to be relatively reform-minded, sought to control lending by engineering three financial squeezes—in June, October and December—that sent banks scrambling for cash and drove up short-term interest rates in the interbank lending market.
The squeezes were direct efforts to limit the lending boom because the banks and shadow banks that have been the most aggressive lenders generally depend on short-term borrowing to fund their loans. The problem was that by engineering a cash crunch—a relatively blunt instrument but one of the few available to it—the People's Bank of China raised fears about the stability of the Chinese financial system.
The results of the squeezes have been higher interest rates, which can potentially slow the economy, and selloffs in the stock market. In June, concerns about the cash squeeze rippled through global markets.
China's cabinet last month distributed rules to regulators that call for stronger oversight of informal lending by the central bank and other regulators. The plan isn't a crackdown on shadow banking, which suggests the leadership wants to preserve a key source of credit for the economy. But it addresses the risks that have been compared to the U.S. subprime credit boom that preceded the housing bust and financial crisis.
The document, which was reviewed by The Wall Street Journal, appears to address the split between the central bank and the separate regulatory agencies for the banking, securities and insurance sectors when it comes to policing shadow-banking activities. China's central bank and other top financial regulators didn't respond to requests for comment on the new rules or on the regulators' efforts to rein in shadow banking.
