The Chinese Government has continued its assault on the country’s shadow banking sector following the shutdown of an illegal operation on September 26 in Guangzhou. The organisation, which was operating out of a food market in the city, stands accused of funnelling $70m out of the country in the last month alone.
Local newspaper China Daily reports that more than 10 bank accounts were frozen to prevent further cross-border asset transfers. The area around Guangzhou has become something of a hotbed regarding illegal financial activity in 2017.
Three large underground banks have already been shut down in the south China province this year and more than 30 suspects have been detained.
The recent closures are also part of wider attempts to tackle the climate of shadow banking in the country. In 2016, the Chinese authorities closed 380 underground banks dealing with more than $135bn.
Three large underground banks have already been shut down in the south China province this year and more than 30 suspects have been detained
According to Reuters, the country is particularly keen to stem unofficial financial activity in order to “prevent and resolve risks from cross-border capital flows”.
Shadow banking was also cited as a major contributing factor to 2008’s global financial crisis, but recent claims by high-profile economists suggest that this threat has largely been resolved. However, developing economies such as China remain at risk, particularly as traditional forms of banking are often restricted.
As the government in Beijing attempts to keep a tight rein on new loans, difficulties in achieving credit may push borrowers towards unregulated sources. In fact, the People’s Bank of China reported that shadow banking contributed 15 percent towards all corporate financing at the end of 2016.
Financial institutions need to perform a delicate balancing act if they are to discourage the growth of shadow banking while maintaining economic control. The continued arrests in China indicate that work remains to be done on this front.