China’s Central Bank has drafted a new policy to manage risks of high debt from shadow banking – lending activities conducted by non-financial institution which could potentially hurt the economy. According to UBS’s report in 2016, China’s ratio of debt to gross domestic products reached 277%, thanks to fast growth from non-bank institutions. Non-bank institutions such as securities brokerages, trusts and insurance companies include loans into their investments products, then further sell them to clients as a high yield investment in comparison to traditional saving deposits. High yield investments are typically termed “Non-standard” assets while “Standard” refers to bonds, stocks and money market assets which yield lower returns. Under the new policy, financial institutions are forbidden to invest in non-standard assets – as a way to control a rise in debt which could harm economic growth.
According to RFi Group data from the China Retail Banking Council, around 8 out of 10 banked people in China own investment products. This figure is higher compared to Hong Kong (77%) or Singapore (64%) at the end of 2016. This new regulation will be able to regulate shadow banking practice and further bring down incidence of investment ownership in the country.
Source : RFi Group – China Retail Banking Council (H1 2016, H2 2016)