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Fitch warns Chinese shadow bank reforms have long way to go

Fitch Ratings has warned that structural pressures in the Chinese banking sector are likely to persist as government efforts to curb shadow banking still have a “long way to run”.

The firm stated: “Recent developments highlight China’s efforts at reforming and regulating - but not rolling back - the growth of shadow banking. This process is still evolving, and Fitch Ratings feels that risks may continue to reside away from the spotlight of the regulators. As a result, structural pressures within the banking sector are likely to persist, exposing short-term rates to volatility but keeping them above historical averages.”

According to Fitch Ratings the key aspects of the reforms include disentangling banks from wealth management products to ensure appropriate risk taking and provisioning on balance sheets.

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In addition the reforms seek to improve the transparency of trusts and their underlying assets and limit credit guarantee companies from taking on too much financial leverage.

But the firm stated: “The reforms may seem like a good beginning, but they have a long way to run. This is because the depth and breadth of shadow banking is still not clear in the absence of exhaustive official data. Moreover, the approach of the principal regulators - the People’s Bank of China (PBOC) and China Banking Regulatory Commission (CBRC) - continues to evolve. In addition, risks continue to lurk away from the view - and at times even the jurisdiction - of these regulators.

“China’s shadow bank reforms will take time to gain traction, and recognition of asset-impairment will be a protracted process. This will manifest itself in eroding liquidity, as cash inflows from borrowers remain under pressure and more resources are directed at forbearance/support. Dwindling cash buffers amplify liquidity risk, and are likely to place structural pressure on interbank rates.”