CHINA will further tighten supervision over the shadow banking sector, the country’s banking regulator said Friday, part of an ongoing campaign to control off-balance sheet lending by the country’s financial institutions.

    However at the same time, the China Banking Regulatory Commission (CBRC) will continue to support buyers of affordable housing, first-time homebuyers and small and medium-sized businesses amid signs of a slowing economy.

    “Currently, the economy, broadly speaking, is stable. But downward pressures are relatively significant which is a reflection of ... imperfect financing structures, inefficiencies in finance allocation and use and difficulties with SME [small and medium-sized enterprise] financing,” a press release circulated at the CBRC’s conference said.

    Wang Zhaoxing, a vice president at the China Banking Regulatory Commission, told a news conference that the regulator will improve ways to manage deposit-to-loan ratios, an indicator of a bank’s ability to absorb risk, and classify bad loans.

    The term shadow banking refers to off-balance sheet lending by banks and any financing provided by a non-bank entity, such as credit guarantee firms, trust companies and other lenders, including pawn shops, for Chinese borrowers.

    The government has been trying to rein in the riskiest forms of non-bank credit, which has grown rapidly in China since 2010, afraid that the funds were being used to roll over bad debt and exacerbating asset price bubbles in real estate and industrial ovecapacity.

    However, China does not want to eliminate all forms of shadow banking, as they can also play a positive role in allocating and pricing capital, while also helping diversify funding channels in an economy historically over-dependent on bank lending for finance.

    Indeed, the growth of total social financing — a homegrown indicator that measures shadow banking as well as traditional lending — slowed in April, highlighting the risk that efforts to restrain high-risk lending could have knock-on effects on healthy credit growth if not handled correctly.

    The shadow banking sector may be worth up to 27 trillion yuan (US$4.32 trillion), a figure accounting for nearly a fifth of the nation’s banking sector, according to a recent report by the Chinese Academy of Social Sciences. (SD-Agencies)