Spotlight is set to shine on shadow banking

Improved regulations on shadow banking are not intended to halt operations, not least because a large part of shadow lending is playing a positive role in supporting the real economy, said the HSBC report.

It noted that shadow lending is essential for driving investment growth. For instance, 26 percent of China's trust loans financed infrastructure projects and 30 percent of manufacturing and commercial companies.

"We expect Beijing to strike a balance between mitigating risks and stabilizing growth. The expected scale-back of the interbank business and improved regulation of shadow lending will likely moderate the growth of total social financing. But even if total social financing growth slows to around 15 percent in 2014 from around 17 percent in 2013, given that the M2 growth target is likely to be unchanged at 13 percent, growth in gross domestic product of 7.5 percent will likely be supported," wrote HSBC economists Qu Hongbin and Sun Junwei in the report. M2 is the amount of money in circulation in notes and coins plus private banking deposits and funds.

There have been rumors that compared with previous banking regulations, Document No 107 stated clearly that all shadow banking entities will have designated regulatory authorities. For those entities which the relevant regulatory authorities have not yet clarified, the central bank will formulate measures with the relevant government departments.

The State Council's guidelines also called for the standardization of cross-market financial products by clarifying the responsibilities of their fundraising channels and risk bearers.

In the past, different Chinese regulatory authorities applied different regulations to financial products of the same nature. Such unequal regulation prompted some regulators to reduce their supervisory efforts over shadow banking, said a financial expert who declined to be named.

Apart from establishing unified standards, regulators need to create a binding mechanism for financial services that are similar to credit activities but currently fall outside their supervision to reduce the scope for regulatory arbitrage, said Liu Yuhui, an economist with the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

Lei, with the Development Research Center of the State Council, said coordination between the PBOC and relevant regulatory authorities is extremely important.

"We need a higher-level coordination mechanism led by a top leader above the central bank and the three main regulatory commissions of banking, securities and insurance, rather than having the central bank and regulatory commissions launching their own regulations for shadow banking," she said.

Lei suggested lawmakers should update laws concerning financial products in a timely way and create new regulations to clarify the nature and supervision principles of shadow banking.

"As new forms of shadow banking are constantly arising, regulators must design the supervision mechanism accordingly to keep up with the development of shadow banking activities by giving sufficient oversight power to different institutions in the market such as law firms, accounting firms and the media," said Lu of the Industrial Bank Co.