Part 3: Does the government need to regulate the shadow banking system in China

In the previous study of Chinese shadow banking system, most scholars are focus on the question “to be or not to be of shadow banking system in China”, some of them think shadow banking system can bring the financial crisis, need to regulate the shadow banking system, the other think shadow banking system can accelerate financial reform, diversification of financial products, therefore, do not need to regulated.  However the Chinese government do not show it attitude of this question at the whole time.

In order to answer this question, it should base on the relevant data. However,  because this is a new topic in China, and the shadow banking system is not regulate by the centre bank, cannot get many official data, it makes this question hard to analysis. Although the Chinese centre bank made a new statistics of All-system Financing Aggregate in 2012, but it only available the data in January 2012, meanwhile, in this statistic, there do not have the relative data of informal financing institution, therefore, in the following part, the data that I used is based on some newspaper, probably do not have strong persuasion, but I will keep focus on the topic, and revise this blog.

There have a picture show us the growth of lending activities in China.

(source from: http://s.wsj.net/public/resources/images/OB-QG723_chinao_K_20111025111829.jpg)

By this picture, we can easily find the ratio of Chinese shadow banking system is keep increase, and in 2011, it has grown to 22% of all new financing in China, but the bank loans is still the main financing channels (click here see details). Compare with the ratio of shadow banking assets divided by the total bank assets 65% in the U.S. before 2008 financial crisis (6.5 trillion US$ of shadow banking assets, Timothy Geithner, 2008), there still have a huge gap.

However, this picture do not consider the informal financial sector, as the last blog said, form Jan.2011 to Jun. 2011, the scale of social financing increased by 7.76 trillion yuan, bank loans increased 4.17 trillion yuan, 53.7% of the total (click here see details), and 46.3% are from the shadow banking system. However in this statistic, it do not include the private lending, according to the statistic of Securities Daily, it estimate there have 3.38 trillion yuan provide by Private lending, it means in China, there have 6.88 trillion yuan increase by shadow banking system, 62.26% of the total, approaching the data 65% of the U.S. before financial crisis. Therefore, in my opinion, if the Chinese government do not want to recommit the same error like the U.S., it needs to regulate the shadow banking system. If not, I think the next financial crisis will be occurring in China. 

However, based on the high percentage of shadow banking assets and the special characteristics of Chinese shadow banking, the regelation of shadow banking system will be a hard work. If China wants to regulate the shadow banking system, it not only need to study the regulation method of other countries, but also need to connect the reality, and established some targeted regulatory programs.