## 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

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### 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.*

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## 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**
  - [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 (Markdown version)](/external/chinese/np/blog/2011/110311c.pdf.md){rel="alternate" type="text/markdown"}
  - [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 (PDF)](/external/chinese/np/blog/2011/110311c.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2011/11/thirdmanalley.jpg](https://www.imf.org/wp-content/uploads/2011/11/thirdmanalley.jpg)

_Source: https://www.imf.org/en/blogs/articles/2011/11/03/the-risks-from-nonbank-intermediation-in-china_