According to the arrangements of financial system reform, the shadow-banking system in China will either transform into on-balance sheet items or securitized -- thus to be under the control of financial supervisory institutions, said Cao Yuanzheng, chief economist of Bank of China International.

China Banking Regulatory Commission (CBRC) said that it will focus monitoring on local government-backed financing vehicles, real estate, wealth investment products, excess capacity and external risks of banks. The administration system that covers all local government-backed financing units and wealth investment products of national banks has been established. The shadow-banking system in China is under the supervision of CBRC.

 "The financial system of China is not facing systematic risk currently," said Lin Caiyi, senior economist of Guotai Jun'an Securities. "Lack of currency issued a warning for the banks that speculation in private fund is no longer a way to survive and thrive in the market. Regulators of China's financial market are trying to change the profit model of banks."

There is still a heavy responsibility for the regulators to help banks liquidize the remnant assets. Guiding capital to invest in real economy industries needs a detailed arrangement of whole financial system.

Firstly, accelerate the market-oriented reform of interest rate and optimize the allocation of loan resources. Government behavior on control and lowering the interest rate of loans has resulted in excess capacity and speculation in the loan market. Some government-owned corporations obtained loans from banks with a relatively low interest rates and received high-interest payments by selling the loans as entrust loans to third parties.Manipulation of the interest rate is the reason for the unbalanced allocation of capital.

Second, the fiscal and taxation system needs reform. The "tumor" of over-leveraging must be removed. Capital will never flow to the manufacturing industry as long as some local government-backed financing investment units maintain 18 percent or even higher costs of capital.

Third, change the period structure of assets and liabilities of banks to support the urbanization process in China. The urbanization process and infrastructure construction require astronomical sums of money in the long term while the current financing system in China is built to support an export-driven economy with short-term financing.

Most of the banks in China have to borrow with short-term maturity and lend with long-term maturity, which leads to the mismatched structure of assets and liabilities. It is an urgent and important need of China to build a long-term financing system using mid- to long-term coupons to lower the financial risk that banks are bearing now.

(Source: Xinhua)