Podcast: How to solve China's shadow banking dilemma

Chinese savers turn to shadow banking for higher returns.

People's Daily Online Business Podcast by Li Zhenyu
Previous: IIF President Timothy Adams on capital market reform in China

The rise of the shadow banking industry is an indication that financial reforms are needed.

According to Moody's, the growth of core shadow banking activities in China has exceeded a cumulative 75 percent over the past two years.

And as of the end of 2012, China's shadow banking credit accounts were estimated at 22.9 trillion yuan ($3.7 trillion), equivalent to 34 percent of the loans throughout the entire banking sector and 44 percent of the country's 2012 GDP, according to Standard & Poor's (S&P).

Curtailing shadow banking is necessary for ensuring the stability of China's financial system because of the risks it posed outside the constraints of bank regulations; however, in an economy that relies heavily on credit expansion, such tightening measures will also weaken China's economic growth.

How to solve this dilemma? Timothy Adams, President and CEO of the Institute of International Finance (IIF), believes that market-oriented financial reforms and liberalizing interest rates would be the answers.

Q: How do you see China's thriving shadow banking sector?

A: Well, shadow banking has grown exponentially over the past 18 months to two years. Some of that is the fact that savers are looking for higher returns and are getting into standard deposit. And if we had that kind of financial sector reform that I think should occur, and you could liberalize interest rates, so that some of those savings that have gone into shadow banking will return back to the regular banking sector.

So I think it shows an indication that reform is needed, and the households are looking for greater returns and greater diversity of products to invest in.

Next: Keys to Keys to China's successful financial reform

• Podcast: The role financial reform plays in transitioning China's growth model
• Podcast: What experiences can China borrow from US in economic reforms?
• Podcast: Why will China become world's fastest-growing consumer market?

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