Faster financial reforms needed to curtail shadow banking danger

Rising risks from shadow banking make this urgent.

The Chinese Academy of Social Sciences (CASS), a top government think tank, believes China must hasten market-based financial reforms to curb the unrestrained growth in shadow banking.

In China, shadow banking now includes vast off-balance sheet guarantees and loans in the banking system in addition to traditional pawn broking and peer-to-peer lending.

CASS said China needs more liberalized interest rates and a unified bond market to prevent borrowers and investors from patronizing the shadow banking system for new funding and higher returns.

It recommended that the Chinese government step-up a series of financial reforms in the near future to crimp the incentives for the blind and explosive expansion of shadow banking system.

The government last June made an initial effort to ease its tight control over bank deposits and lending rates, but there are rising calls for a more liberalized interest rate to fully reflect market forces.