View of Shanghai. Photo: AFP
View of Shanghai. Photo: AFP

On Saturday, China’s banking regulator issued new rules to shine a light on the country’s shadowy entrusted loan market, worth a reported US$2 trillion.

The lending practice, a form of inter-company financing, is one of the main segments of China’s shadow-banking industry, operating without risk controls required of licensed lenders. Entrusted loans allow banks to act as guarantors without reflecting the debt on their balance sheets.

The new rules will require disclosure of the source and intended use of funds, while prohibiting banks from guaranteeing the loans.

Under the regulations, commercial banks will also be required to step up risk management of the lending, which is frequently used by borrowers unable to get approval from banks.

Authorities’ focus on shadow banking to start the year underscores Beijing’s resolve in tackling risk in the sector, which continued to grow into last year. Total shadow banking assets grew by a slight 0.5% margin to 64.7 trillion yuan by the end of June, according to the Financial Times, citing data from Moody’s. That accounts for 27% of China’s total banking assets.