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China regulatory failure to contain financial excesses putting off some foreign investors

  • As long as demand for credit from cash-strapped small businesses and investors remains unaddressed, financial excesses are likely to recur, analysts say
  • Despite regulatory clampdown P2P lending platforms are unlikely to disappear because banks are reluctant to lend to small companies due to credit risk

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To tackle financial risks in the banking system, China has taken a hard stance against shadow banking. Photo: Reuters

The inability of Chinese financial regulation to contain financial excesses has put off many foreign investors who would otherwise want to put their money into the country, analysts said.

The key problem is that Beijing has not yet found a way to meet the large demand by small private sector businesses, investors and entrepreneurs for credit through legal and regulatory compatible financing channels, analysts say. Until it does, it will continue to contend with a series of quasi-legal and highly speculative financing channels to meet that funding demand that will pose additional risks to the nation’s financial system.

As the examples of the rise and fall of the shadow banking systems and peer-to-peer (P2P) lending platforms show, creative Chinese financiers will continue to push against – and, if needed, circumvent – the bounds of law and regulation to create highly lucrative ways to meet the capital demands of small businesses and investors.

Foreign investors also want to take advantage of the strong need for credit in China, but uncertainty over the regulatory environment has put many of them off.

China’s private sector is as capital starved today as it has been perhaps for 20 years or more
Peter Fuhrman

“There is huge demand and private equity funds in the West are beginning to lend. However, they are demanding sky-high rates due to the huge risk of lending to private corporates in China that often have unstable funding and during a time of slowdown in China. For these reasons, only the larger funds with good research teams will jump in with any strength,” said Andrew Collier, managing director at Orient Capital Research.

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