Lurking in the Shadows—The Risks from Nonbank Intermediation in China
IMF Blog, November 3, 2011
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Bibliographic details
- Authors: Nigel Chalk
- Published: November 3, 2011
Background and context
- Author: Nigel Chalk; Date: November 3, 2011.
- Post-crisis dynamics: 2009 government response caused bank lending as a share of the economy to expand by close to 20 percentage points in less than a year.
- Data constraints: "The central bank’s numbers on social financing are the only credible and comprehensive public source, but even that gives only a partial picture."
Channels and manifestations of nonbank intermediation
- Types and developments:
- High volumes of bankers’ acceptances—off-balance sheet short-term credit.
- Trusts and entrusted lending vehicles (China’s form of asset securitization) have recently taken off.
- Informal lending, including loan sharks and narratives such as Wenzhou.
- Short-term lending by nonresidents to Chinese corporations: in the 12 months to June, over RMB 600 billion poured into China.
- Financial leasing companies expanding and providing credit-like services.
- Corporate bond market growth: perhaps reaching RMB 1 trillion in new issuance for this year.
- Unknown volumes of inter-corporate lending.
- Some nonbank institutions making direct loans to large corporations to boost profitability.
Major risks and concerns
- Scale of credit expansion:
- New bank credit alone is likely to be over 20 percent of GDP this year.
- Investment is "fast approaching 50 percent of GDP."
- If a similar amount (or more) is being intermediated outside banks, total credit stimulus could be very large.
- Regulatory and supervisory gaps:
- Oversight for nonbank intermediaries is likely far less effective and comprehensive than for banks.
- Deposits and lending can migrate out of the regulated banking system to avoid scrutiny.
- Bank health and systemic risk:
- Rapid growth of nonbank channels could shift resources out of banks and undermine bank stability if banking reforms lag.
- Macro policy control:
- China relies heavily on quantitative limits on bank lending (bank-by-bank credit quotas) rather than active use of interest rates and reserve requirements.
- The development of nonbank intermediation undermines the ability to enforce credit policy and guide the economy’s trajectory.
Regulatory response and policy recommendations
- Recent supervisory actions:
- Regulators moved to require a large share of trusts to be brought back onto bank balance sheets.
- The bank regulator issued instructions to banks to stop moving loans off their books and repackaging them into wealth management products.
- Limitations of reactive measures:
- Authorities risk perpetually being one step behind financial innovators—"always patching up the last hole in the system."
- Recommended course:
- "A careful reexamination of the whole monetary and financial framework."
- Reduce reliance on administrative credit restraints; use interest rates and price incentives more actively to manage demand for loans.
- Pursue financial and monetary reform on a timetable driven by careful, pre-emptive, and concerted policy planning to avoid uncoordinated and disorderly change.
Scenarios and policy choice
- Two divergent paths:
- Proactive path: pursue coordinated financial and monetary reform to stay ahead of disintermediation and close supervisory gaps.
- Reactive path: allow change to evolve in an uncoordinated and disorderly way, with innovation and disintermediation outpacing supervisory capabilities and revealing regulatory gaps.
- Stakes: Delay in reform risks undermining China’s long track record of growth and could have broader implications for the global economy.
Lurking in the Shadows—The Risks from Nonbank Intermediation in China, Nigel Chalk, November 3, 2011.
Content in this bundle
- iMFdirect 博客: 潜伏在阴影中——中国非银行中介带来的风险, 2011年11月3日
