Chinese banks wait for signal on direction (3)

Time to address problem

This is probably a good time for regulators to address the problem before more defaults occur.

The issuance of the risky products is picking up as the year-end push to secure deposits intensifies, Fitch Ratings said in a report last week. The value of outstanding wealth management products topped 12 trillion yuan by the end of September, and the figure is expected to reach 13 trillion yuan by year's end, up from 8.5 trillion yuan in 2011, the rating firm said.

Smaller lenders were the key driver of the rise in issuance. Their thinner liquid assets and narrower deposit bases make them less equipped to handle the risks associated with such products, according to the ratings agency.

The CBRC excludes the 13 trillion yuan of products in its official estimates of the nation's shadow banking system, according to Reuters.

Australia & New Zealand Bank estimated in a report issued last week that such products will account for about 13 percent of the aggregate assets of the banking industry this year and a third of the nation's gross domestic product.

Zhou Xiaochuan, the governor of the PBOC, said last month that the nature and scale of China's shadow banking system is nothing compared to that of developed countries.

The global shadow banking system has more than doubled in size in the past decade, becoming a US$67 trillion industry last year, according to the Financial Stability Board, the Basel-based international authority that oversees global financial risks. That figure is virtually the same as global GDP of US$70 trillion at the end of 2011, or 25 percent of the assets of the global financial system, it said.

The United States has the largest shadow banking system, with assets of US$23 trillion last year, accounting for 35 percent of the global system.

China contributed 3 percent, after the eurozone, the UK and Japan, according to the report.

Zhou may be right about the scale of the shadow banking, but neither he nor any financial regulatory body in China can be sure how much that exposes the Chinese banking system to risks.

Chinese regulators, generally renowned for their prudence, have pledged to guide the banking industry toward a more healthy development track.

"The banking industry will enhance its capacity to serve the real economy, conduct businesses by the law, improve financial services, limit risk exposure, and maintain a stable operation," the CBRC said in a report earlier this year.

The coming Central Economic Working Conference, which will set the tone for 2013's monetary and fiscal policy, is expected to give directional signals to Chinese lenders about which road they should take at this critical junction.

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