'Shadow banking' financing explodes in past decade

BEIJING -- China's shadow banking system has experienced explosive growth and played an increasingly apparent role in funding investment over the past decade, according to a report issued by the People's Bank of China on Thursday.

In a report reviewing social financing activities in the 2002-11 period, the PBOC, China's central bank, said the volume of off-balance sheet transactions outside the country's banking system has grown dramatically over the past 10 years, giving enterprises greater access to funding while making regulation even more difficult.

According to the PBOC, yuan-denominated loans made up 91.9 percent of overall social financing in 2002, but that proportion declined to less than 60 percent since 2010 as companies turned to corporate bonds, acceptance bills, stock offerings, insurance compensation and other financing vehicles to fund their investment activities or keep away from regulation.

Many non-loan financing activities are carried out by the so-called "shadow banking" system through unregulated transactions of acceptance bills, commercial papers and investment products that will not show up on conventional balance sheets.

Funds raised by private equity funds and hedge funds in China are not counted in social financing data calculations, according to the PBOC.

Of all social financing, new yuan-denominated loans reached 7.47 trillion yuan ($1.18 trillion) in 2011, or about four times the amount seen in 2002, according to PBOC data.

In contrast, funds raised through non-loan financing activities exploded to 5.36 trillion yuan in 2011, representing a 32.7-fold increase from that of 2002.

The central bank began releasing official data on social financing in 2011 after the amount of money companies acquired from non-bank financial institutions started to surge in 2010 when the government tightened credit to curb the runaway property market.

The calculation of social financing data is a reflection of the global financial crisis, as many observers believe much of the credit lending activity occurred outside the banking system, leaving banks' traditional balance sheets unable to show a true picture of the credit situation.

The PBOC forecast that the proportion of yuan-denominated loans in social financing will further drop as financial innovation continues to grow rapidly.

"Many off-balance asset-backed securitization activities not only involve those traditional commercial banks, but a large number of shadow banks, as well," said a spokesman for the Survey and Statistics Department with the PBOC.

"If regulators narrowly apply the macro prudent management principle, many important, systemic financial institutions and products will be ignored and systemic risks will build up," said the spokesman.

The rapid increase in non-loan financing partly explains why the Chinese equity markets posted the world's worst performances since the beginning of 2012, with the Shenzhen index losing 7.94 percent and the Shanghai index softening more than 6 percent in the January-August period.

The spokesman said only using indicators such as the traditional money supply, M1 or M2, and banks' new lending figures is not adequate for the central bank to conduct monetary operations.

"We need to monitor a much broader range of credit figures," said the spokesman.