Scholar said China's shadow banking system not always harmful

A Hong Kong scholar told the APD that the Chinese mainland's shadow banking system is not definitely harmful, as long as it can be properly regulated.

The Fitch Ratings, a global rating agency, recently downgraded China's sovereignty debt's grading from AA- to A+, the first time for the world's second largest economy since 1999. The main reason, according to Fitch, is due to the looming financial risks in the country, such as shadow banking system and local government debt.

Raymond So, professor at the Hang Seng School of Commerce of Hong Kong, said the initial emergence of the shadow banking system stemmed from the versatility of shadowbanks.One of the most evident example is that they offer a wide variety of amount of loans to their customers, ranging from tens to millions of yuan.

But he said that shadow bankings is not always negative.

"Because of the shadow banking activities, the traditional banks are more creative, more flexible. They would creat pressure on the proper banking business, to reconsider the share.Then it would create a kind of improvement, or a kind of revolution forces, to the traditional banking sector, so I would expect the Chinese banking system would be improving and would become more efficient, so as to make maintain a equivalent."

However, So also mentioned about the underlying risks therein.

"You may easily overborrow or you over lend. You don’t know what really goes on in the market there, you pay high interest to the depositors, and then you make loans, regardless of the risk, just base on the percentage of interest rate that you can charge. This kind of money may become very speculative (when investing) in different sectors. Once the sector is not performing well, the market collapses, then you would create this kind of chain reactions. "

So said that shadow banks do not only exist on the Chinese mainland, but also in states with mature financial systems like Hong Kong.

"Before Hong Kong becomes a financial centre, a lot of shadow banking activities do exist. In these days, there are shadow banking activities in Hong Kong as well.Just look at those kind of finance companies, whenever you have a mortgage, whenever you have a property, you can re-mortgage the property to obtain additional financing."

He said that the key word of regulating is "transparency".In March, the China Banking Regulatory Commission issued a directive to demand traditional banks to regulate credit asses to increase transparency of their balance sheets. So said this is a correct move.

"When a bank makes a loan, whether it is transparent enough or not, we have to make market a kind of regulative forces to monitor the whole system. "

But he added that it takes time to fully implement this policy.