Regulating China’s Shadow Banking System Isn’t Easy

Throughout China, private lending services are seeing clients disappear as a result of the “shadowing banking system,” which provides borrowers with black-market loans.  Government-sanctioned loan brokers were established by former premier Wen Jiabao after more than 80 businessmen in Wenzhou committed suicide or declared bankruptcy.  The goal was to match businesses in need of cash with private loans, draft loan contracts for the resulting deals, and monitor payments.  However, the plan has had very little success as so many Chinese citizens opt for the informal market route.  According to a survey, 90% of families and 60% of companies participate in the shadowing banking system.  UBS values the system at $3.4 trillion, about 45% of China’s gross domestic product.  Ultimately, because of the Chinese economy, which is growing at its slowest pace in 13 years, many find themselves unable to pay off their loans.

The Chinese government is calling for regulation and increased transparency of this market.  It is important for records on loans to be correct in order to determine accurate credit ratings so as to not mislead investors.

Written by: Constantine Kostikas



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