The dangers of shadow banking may impose dire consequences on China’s economy.
According to Yi Huiman, chairman of the world’s largest bank as measured by assets, the Industrial and Commercial Bank of China, the practice has become a top-level concern due to the increase in poorly regulated lending.
The New York Times describes shadow banking as lending that takes place outside of official banking channels, when government-controlled financial institutions are unable to lend to private businesses or customers.
However, the sharp increase in this type of lending is seen as risky because of the potential impact it could have on the financial system.
Yi recently warned about the spread of unregulated investment practices and the sale of wealth management products that are often kept off bank balance sheets.
Shadow banking “is not subject to full regulation, or any regulation at all,” Yi told the New York Times. “We have to focus. If not, the real economy will suffer.”
He noted that if shadow banking is not dealt with correctly, the risks could be significant.
The Vice Chairman of the China Insurance Regulatory Commission, Chen Wenhui, also voiced concerns over the issue and said that regulators are now trying to determine exactly how internet lending platforms are able to expand so quickly and raise so much money from the general public.
He said that the public is pouring large sums of money into these lending platforms despite the fact that they typically do not disclose how they will invest the money they raise.
“They just buy the investments,” he added. “They have no idea what the product is.”