Shadow banking within safe limits

The China Banking Regulatory Commission recently identified the supervision of shadow banking as one of its main goals for 2014.

Thanks to their role in precipitating the global financial crisis back in 2008, many have become concerned about the spread of shadow banking activities in China. According to estimates, the value of the US shadow banking market surged from $22 trillion in 2002 to $60 trillion in 2007, by which point it accounted for 67 percent of total assets in the country's banking system.

In China though, regulators have less cause to be alarmed about off-balance sheet financing activities. First of all, the scale of such activities is still quite limited. According to a recent report from the Chinese Academy of Social Sciences, China's shadow banking market is valued at roughly 14.6 trillion yuan ($2.41 trillion), the equivalent of just 10 percent of the country's banking assets.

If regulators are too heavy-handed in curbing shadow banking, they could end up sabotaging an important arena for banking sector innovation.