China launches emergency probe on banks to check risky lending: sources

SHANGHAI (Reuters) - China’s banking regulator this week launched emergency risk assessments of lenders’ new business practices, sources told Reuters, as Beijing deepens its crackdown on shadow banking.

Guo Shuqing, the newly-installed chairman of the China Banking Regulatory Commission (CBRC), has vowed to clean up “chaos” in the country’s banking system. In cooperation with the central bank and other financial regulators, efforts have been stepped up to clamp down against shadow finance ahead of a key Communist Party congress in the second half of this year.

The CBRC’s latest investigation will probe how lenders are using proceeds from negotiable certificates of deposit (NCDs), as well as their bond investments and outsourced investment businesses, two sources with direct knowledge of the plan said.

The watchdog is also looking into possible violations of lending and investing rules, for example, by banks that invest in stocks via wealth management schemes or lend to their own shareholders, they said.

China’s shadow banking sector has exploded over the past few years, reaching an estimated 64.5 trillion yuan ($9.4 trillion) in 2016, according to Moody’s, as banks use trust firms, brokerages and fund houses to channel deposits into risky investments, skirting lending and capital rules.

More recently, smaller lenders have been aggressively raising money via NCDs, and then using the proceeds to make higher-yield, risky investments.

The newly-launched assessments come after the CBRC sent a flurry of new policy directives last month aimed at eradicating regulatory arbitrage and other risky practices.

Earlier this month, the Group of 20 economies’ financial risk monitoring agency criticized Beijing for being slow in providing key financial data from China, leading to the delay in a report on the risks the world faces from shadow banking.

Reporting by Li Zheng, Samuel Shen and John Ruwitch; Editing by Jacqueline Wong