China’s State Council issued an order imposing new limits on shadow banking, two people familiar with the matter said, in the highest-level effort yet to control off-balance-sheet lending.
The new rules include banning transactions designed to avoid regulations, such as moving interbank lending off balance sheets, said the people, who asked not to be identified because the order has not been made public.
The regulations were sent to ministries and local governments last month, the people said.
The rules reflect government concern that an industry estimated by JPMorgan Chase & Co at 36 trillion yuan (US$5.9 trillion), or 69 percent of China’s 2012 GDP, may threaten the stability of the financial system.
The Cabinet told ministries and local governments to tighten enforcement of current rules on shadow finance, the people said.
The new rules also include a ban on using third parties to evade restrictions on lending directly to certain borrowers, according to the people. The government restricts lending to property developers as part of a campaign to control home prices.
China Business News reported earlier yesterday the country formally issued rules on shadow banking and clarified the definition of the business for the first time. The report cited a person familiar with the matter who was not identified.
Shadow banking includes activity ranging from trusts to banks’ off-balance-sheet savings vehicles, known as wealth management products, and private lending between individuals. A lack of transparency has made it difficult for the government to control the level of credit in the economy, while increasing the risk of default.
A Chinese audit of local governments exposed an increased reliance on shadow banking. Local government debt overdue at the end of June last year was 1.15 trillion yuan, or 10.56 percent of borrowings, according to National Audit Office data.
In other moves to rein in credit, the government last year tightened rules on bond sales by local government financing vehicles and companies in industries with overcapacity, while the central bank has tolerated higher interbank lending rates, leading to spikes in June last year and last month.