World Bank Report Critical of China’s ‘Shadow’ Banking Sector

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The World Bank released a damning report on China’s banking sector this week entitled “China Economic Update.”

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In unusually forthright language, the bank said Beijing urgently needs to overhaul the government-run banking system that subsidizes state industry at the expense of savers and provides little support for entrepreneurs and emerging industries encouraging an unregulated shadow banking sector that, in turn, creates risks.

Government as Both Bank Owner and Regulator

According to US News & World Report, quoting sections of the bank report, Beijing needs to separate its roles as owner of China’s banks, regulator and strategic planner and to construct a system that channels more lending to productive industries and manages risks better. The Chinese state has formal ownership of 65% of commercial bank assets and de facto control of 95% of assets, according to the report. It said that while some other countries have state-owned banks, by comparison using the same calculation that figure is 74% in India and 40% or so in Russia neither of which a paradigms of free enterprise, China’s entire financial system is government-dominated.

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For China to truly prosper, the World Bank says Beijing must stop being both regulator and owner of its banks.

“Instead of promoting the foundations for sound financial development, the state has interfered extensively and directly in allocating resources,” the World Bank said, adding reducing the “unique and distorted role of the state” in banking and the wider financial sector was crucial, according to a further report on the World Bank report in the UK BusinessInsider.

How the China’s Banking System Creates More Debt

The article accused China of, “Wasteful investment, over-indebtedness, and a weakly regulated shadow-banking system.”

In some cases, it added, authorities were simultaneously owners, regulators and customers of banks.

The bank says further growth is at risk if these distortions in the banking system are not addressed and after raising the same concerns in their 2012 report said risks to the system had actually increased in the interim. China itself has set a target of about 7.0% growth in GDP for this year, a figure the bank broadly accepts saying it should be similar next year before slowing further in 2017 to about 6.9%.

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