In this article, the FT reports on China's tightening of policies on shadow banking.
Shadow banking, in a nutshell, is the practice of a non-bank entity facilitating investments. It is mostly off-balance sheet transactions; thus, mostly unknown to the uneducated investor and not held to the same standards as normal loans by regulatory bodies. It makes up a huge volume of today's investment pool.
This may be in poor form, but here's the Wikipedia on it for anyone who wants to know more.
What are your thoughts on this practice? Should there be increased regulation on shadow banking practices? It seems profitable and efficient for all parties involved; however, the lack of regulation on these non-banks acting as loan agents makes for "risky" business practices.
China is an especial case because the Chinese government controls the banking system. That is why the Chinese government will definitely apply new regulation to reduce the risk in the financial areas. However, when one goes beyond this perspective, one should realize that the shadow bankers are a market that emerge from the confidence of the people. People have decided to invest throughout those shadow banks instead of the regulating markets. Probably, people believe that the regulated bankers do not have the enough elements or not comply with the requirements for enhancing the investor's investments. The role of the government should be focused on the equity access to the laws and not as an administrator in the markets. That means that the government should limit its role as regulator and manager. In that case, the government should not decide the rules nor do any bailouts.
ReplyDeleteNot only do they make for risky business actions it also makes for a risky economy. Investment can go down very suddenly when this investment is taken away and then the China's government will need to step in to help keep the economy afloat. Which will crowd out other private investors. This may be helpful in making sure that China's economy does not have a hard fall.
ReplyDeleteIt seems as though this practice was pretty vital to China's growth. Most surprising to me is the fact that Chinese policymakers see shadow banking as "a healthy development for China," though still must be monitored. While the government plans to tighten restrictions on shadow banking, I think it is interesting that some members of the government support some degree of this practice.
ReplyDeleteShadow banking have lead China to become more reliant on debt creation for growth. As long as the overall debt for China is under control, I won't be too worried by such practice. However, the situation should be monitored very closely or else the debt can grow beyond the control of the government. Hence it is sensible for China to tighten the regulation before it leads to a credit bubble.
ReplyDeleteI agree with Utsav that the situation should be monitored very closely. I think the government should play a big role in regulating China's shadow banking industry. I'm sure China doesn't want a credit bubble like the United States so close regulation will only prove to be a good thing.
ReplyDeleteI think shadow banking is a threat to China's economic stability and it needs to be monitored carefully. Shadow banking increases the risk of investment and leads to a risky economy. I have to agree that government intervention and tightened regulation will help prevent a hard fall in China's economy.
ReplyDelete