CHINA should grasp the opportunity to guide shadow banking to serve businesses with needed financing, while at the same time strengthening regulation of the sector, a central bank official was quoted as saying.

    A string of shadow banking defaults, such as that of a 4 billion yuan (US$652.18 million) credit product backed by Evergrowing Bank earlier this month, have raised speculation about whether the government will crack down further on the sector.

    “Under the current conditions of authorities stepping up oversight of the capital requirement on banks, banks need to seek out other financial intermediaries to relieve pressure on financing requirements,” the Xinhua news agency reported People’s Bank of China Vice Governor Hu Xiaolian as saying at a conference Thursday.

    Hu emphasized that shadow banking should be encouraged in so much that it benefits the real economy and said she could not deny that it satisfies, to a certain degree, a need for multiple levels of financing.

    Shadow banking, a term that broadly refers to a variety of lending that does not appear on bank balance-sheet, allows for wider freedom to set lending rates but is also riskier as it is less subject to regulation.

    The popularity of off-balance-sheet products has exploded in recent years, with banks and trust firms marketing them as high-yielding alternatives to bank deposits, but analysts warn that the risk of defaults is rising as the world’s second-largest economy slows.

    ANZ Research estimates that China’s shadow banking sector may have reached around 33 trillion yuan by mid-2014, the equivalent of around 58 percent of 2013 GDP or 20 percent of total bank assets.

    (SD-Agencies)