Chinese Banks Push Back On Shadow Banking Regulations – Expose “Catch-22” For Financial System
In November, we discussed how the post-Party Congress measures to deleverage and crackdown on the worst abuses in China’s credit bubble took an important step forward with the announcement of a new era of regulation for China’s $15 trillion shadow banking and asset management industry. See “A New Era In Chinese Regulation Means Turmoil For $15 Trillion In China’s Shadows”. In particular, the authorities turned their sights on wealth management products (WMPs).
On the way out are “guaranteed returns” and “capital pools” which had turned the $4 trillion sector into a leveraged Ponzi scheme. We joked that in a “radical and shocking” departure from the norm, financial institutions would have to offer yields based on the risk and returns of the underlying assets. Paying out guaranteed returns with new funds from depositors would no longer be allowed.
Commentators at the time described it as “a new era of regulation” which would lead to tighter risk control and slower but higher quality growth in the Chinese economy, blah, blah. However, our interest was piqued by the implementation date for the new rules. This is slated for the end of June 2019, providing Chinese banks and the entire shadow banking system a grade period to get their house in order. As we suggested.
We can only guess the delay reflects the enormity of the problems discovered by China’s regulators when they finally looked under the hood.
We didn’t have to wait long for confirmation that our cynicism was justified. It turns out that there was a “closed-door meeting” last week during which Chinese banks laid out the systemic risk if the regulators pursue their reform plan. According to Reuters.
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