By ZHOU LANXU/JIANG XUEQING | China Daily | Updated: 2020-12-08

China's shadow banking sector is expected to become healthier in 2021 amid improving regulatory efforts to de-risk the sector, after assets of the most risky shadow banking activities contracted by nearly a quarter from an all-time peak, experts said on Monday.

The country's shadow banking assets, by the narrow measure that covers the riskier activities, dropped to 39.14 trillion yuan ($5.98 trillion) by the end of 2019, down 23 percent from the historical high at the end of 2016, officials from the China Banking and Insurance Regulatory Commission said in a report.

"The hidden danger of China's shadow banking used to be severe. After several years of efforts, the risk situation has shown preliminary signs of a fundamental improvement," said the report, released on Friday by Financial Regulation Research, a journal backed by the regulator.

Shadow banking, or the lending business outside the banking system, has drawn high attention from the country's top leadership, as the sector can spark systemic risks and has expanded at a 20-percent-plus annual rate in China for years since 2008, the report said.

Under the broad measure, shadow banking assets slid from 100.4 trillion yuan at the beginning of 2017 to 84.8 trillion yuan as of the end of 2019. The number is equivalent to 86 percent of China's GDP, versus 123 percent in 2016, the report said.

Meanwhile, shadow banking has become more compliant with rules and streamlined product structures, it said.

Tang Jianwei, chief researcher at the Bank of Communications' Financial Research Center, said the overall risk situation from shadow banking will be contained further as the regulatory framework improves.

"The aim is not to eradicate shadow banking but to incorporate it into the regulatory system. The sector can be a complement to the financial system if it is well regulated," Tang said.

"Shadow banking is part of the financial system and we must establish a regulatory framework of ongoing regulation (for shadow banking)," the report said, adding that shadow banking will long co-exist with the traditional financial system.

The country should promote a healthy development of shadow banking and reduce its risks, making it a positive factor for maintaining financial stability and an important force supporting the real economy, the report said.

It proposed to improve the statistics and monitoring of shadow banking, prevent high-risk shadow banking business from rebounding, establish mechanisms to isolate risks, and improve related rules to ensure seamless, unified regulation.

Dong Ximiao, chief researcher of Merchants Union Consumer Finance Co Ltd, said risks of the shadow banking sector are expected to further mitigate next year, with the asset scale lowered and more results achieved in revamping some key subareas like the trust industry.

"Risks of shadow banking are usually hard to detect and easy to spread, therefore requiring strengthened regulatory efforts. But on the other hand, shadow banking is not unacceptable as it enlarges channels of financing and investment, and particularly caters to private businesses' financing needs," Dong said.

For the first time, the CBIRC has systematically listed standards to distinguish shadow banking in China in the report, including acting as credit intermediaries outside the banking regulation system, using complex product structures and high leverages, and carrying out incomplete information disclosure, among others.

Financial products and activities largely comply with the set of standards belonging to the broad measure of shadow banking, while those that are more characteristic and riskier fall into the narrow measure, the report said.