China introduces tighter interbank lending rules to curb shadow-banking industry

Nathan Andrada – Fourth Estate Cooperative Contributor

Beijing, China (4E) – China’s central government has ordered lenders to reduce interbank borrowing as part of its effort to curb growth in the informal shadow-banking industry that could pose a threat to the world’s second-largest economy’s financial system.

The People’s Bank of China (PBOC) and the country’s top banking, securities and insurance regulators issued the new rules. They aim to target a popular strategy utilized by Chinese banks that make corporate loans appear as loans to other banks, so that they can set aside less capital and reserves and make their balance sheets look healthier.

Under the tightened rules, the interbank borrowing limit for a commercial bank is less than a third of its liabilities, while its lending to another financial institution should remain below 50 percent of its Tier 1 capital, according to a statement by the PBOC. Financial firms are required to improve their management of control liquidity risks and the maturity of interbank funding, the central bank.

The new bank lending rules come as China’s economic growth loses its momentum. Analysts believe Beijing is reluctant to use monetary stimulus to spur the economy.

Over the last five years, borrowing between financial firms on the interbank market grew three times in volume, expanding underground finance as banks try to avoid government capital requirements and lending restrictions.

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