Tackling risks in China’s labyrinthine financial system is often compared with a game of whack-a-mole: knock down one risk and another pops up somewhere else.
It doesn’t help when no one has a very big hammer or reliable mole data.
China’s fragmented financial regulatory apparatus has been one reason for the nation’s rapid, dangerous buildup of debt. So Tuesday’s news that the ineffectual insurance regulator will be merged with its banking counterpart should be a net positive for financial stability.
Just beefing up the sheriff’s department won’t address the fundamental forces that have driven the growth of Chinese shadow banking, however. Too many Chinese firms still struggle to access formal bank finance, while too many Chinese are still losing money on their bank deposits, meaning they are happy to lend at higher rates through dodgier channels.
While that is true, pockets of high-interest lending to questionable borrowers will remain sequestered somewhere: Those beasties will only emerge when the economy turns down again. Meanwhile, the authorities can’t crack down too hard on shadow banking for fear of precipitating the very credit crunch they hope to avoid.
Regulators, like generals, are always fighting the last war. In 2015 and 2016, banks and insurers sold hundreds of billions of dollars worth of high-yield investment products to attract funds. Eventually, that triggered a crackdown: Banks’ and insurers’ wealth-management-product business has dropped off sharply, with outstanding bank WMPs growing by just 1% last year, down from double-digit growth rates in the prior two years.
The latest regulatory reshuffle means banks and insurers now have to report to the same place. That should help tame the rise of acquisitive insurance firms like Anbang, which was placed under state management in February. Companies of its ilk will in future find it hard to build massive asset-management businesses under the radar to fund their ambitions. China’s corporate bond market, which has relied on WMPs for liquidity, may continue to suffer too, as the new regulator monitors those products closely.
The moles of Chinese shadow finance are still likely to get busy elsewhere, with so much of domestic industry and infrastructure dependent on it for survival. Lending by trust firms, an older form of shadow finance, has already roared back as the WMP business has withered: Total trust assets hit 24 trillion yuan ($3.8 trillion) in third-quarter 2017, up by more than a third from a year earlier. Brokerages, another key channel for WMPs, will meanwhile still be under a separate securities regulator.
China’s regulatory structure is improving. But it is far too early to declare victory against China’s ever-resourceful financial engineers. The moles are still down there, digging away.
Write to Nathaniel Taplin at email@example.com
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