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Shadow banking treat to Chinese economy

Staff writer |
The rapid growth of China's shadow banking may spread risks quickly from the money market to the real economy and trigger a systemic financial crisis, a report on financial regulation said.

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Non-traditional financing directly involves a total of 36 trillion yuan ($5.85 trillion) of assets in China, according to a report by the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

Interbank business is the critical link. Once the risks with shadow banking become real problems in the interbank market, banks and other financial institutions may face a liquidity drought, bringing defaults and a credit crisis in its wake.

"As the interbank business is expanding quickly, financial risks become more contagious within the banking system," the institute said. "Regulators should attach great importance to the supervision of interbank business."

Faced with the combined pressures of interest rate liberalization and Internet finance, China will have to keep adjusting its banking regulatory polices to handle off-balance-sheet, cross-border and cross-sector risks and improve the banks' management skills, the report said.

Regulators should also experiment with allowing private capital to establish banks at its own risk and continue deepening institutional reforms of the banking sector, it said.

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