Taming expansion of lending by shadow credit system is key to China’s economic reforms

While new estimates from Swiss bank UBS point to weakening shadow lending activities amid supervisory tightening in China, concerns over massive amounts of shadow credit are keeping market observers on edge as they fear a shadow banking implosion.

For there to be sustained confi dence in China’s economic stability, the country must be resolute and unwavering in its eff orts to curb shadow banking risks. The results of such eff orts will play a decisive role in guarding the country against systemic fi nancial risks.

China’s total social fi nancing ( TSF), which measures the broad level of credit and liquidity in the economy, doesn’t cover all shadow credit activities. For example, some shadow credit extended via nonbank fi nancial institutions is missing from the full credit and debt picture, according to a recent UBS report.

Still, the availability of more details on lending activities has led the bank to revise its estimate of “missing” shadow credit down to the level of as much as 16.8 trillion yuan ($ 2.49 trillion), equivalent to 11 percent of outstanding TSF. The previous estimate was 22 trillion yuan.

The incomplete fi gures on TSF dampen market sentiment that would otherwise be lifted by signs of softening shadow credit in light of China’s ongoing tightening of regulatory oversight. The gigantic shadow credit overhang can be a time bomb if not dealt with in a timely and eff ective manner.

Admittedly, there are worries about the impact of supervisory tightening on the country’s fi - nancial innovation, notably in the world of fi ntech, considering that rapid innovation in the fi nancial sector is seen intertwining with the rise of shadow credit that plagues the Chinese economy. But that should by no means be an excuse for further shadow lending indulgence.

These could easily turn into a nightmare for the Chinese economy if allowed to run their course without hindrance. China can hardly make great breakthroughs in economic reforms if it fails to tame rampant debt.

There shouldn’t be any doubt that stability comes before innovation if something has to be sacrifi ced. Market watchers are gratifi ed to see the country is moving in this direction, with the newly announced fi nancial stability commission expected to address the issue of regulatory arbitrage, which has been blamed in part for shadow credit growth. The commission’s responsibilities include making fi nancial reform plans, coordinating fi nancial policies to enable regulatory synergy, drafting rules to fi ll regulatory gaps, and holding offi cials accountable for inadequate regulation.

This surely means concrete steps are in the pipeline to not only continue the regulatory tightening, but more importantly to permit more eff ective and effi cient oversight of shadow loans, among other fi nancial activities. The author is a reporter with the Global Times. bizopinion@ globaltimes. com. cn