No Sympathy for Shadow Banking in China

Andrew Stiles

When China’s stock market bubble burst in 2014 and 2015, many people of China’s labor class lost their life savings. While the government fully reimbursed investors with money in state-owned banks and investment firms, the Chinese Communist Part [CCP] offered no relief to investors purely in the private sector. This is largely due to the rise of shadow banking in China – that is, investment firms that are able to circumvent the strict regulatory standards that most Chinese investment institutions follow. Growth in the number of these new Chinese firms peaked just before 2011, but has drastically declined since 2013.

Over the past few decades, China has rapidly become privatized, and a significant portion of the population runs personal finances through the private sector, as opposed to state-owned banks. This portion of the population has suffered severe financial losses without any form of loss insurance. China has a mandatory retirement age of 50 for women and 60 for men, so citizens who are near or above this age are panicking, now that their nest eggs are gone.

Many of the affected citizens are taking to the streets to demand assistance from the government. Wall Street Journal reporter Chuin-Wei Yap followed a Chinese citizen named Yang Bao Yu, who had lost his $37,000 retirement savings when a Chinese shadow banking firm closed in 2014. Chuin-Wei wrote that the firm had promised returned of up to 18%, which attracted millions of ‘mom and pop’ investors. After losing his retirement savings, Yang Bao Yu joined hundreds of protestors demanding that the government aid them, but the CCP sent police forces to disband the protestors.

As more Chinese citizens realize that the government will not take responsibility for their failed private sector investments, investor confidence in China could continue to destabilize. Chinese regulators are attempting to solve this problem by eliminating shadow banks, and the government has jailed many of the firms’ executives for trying to subvert regulatory standards. The CCP may be able to purge the markets of these shady firms, but this does little to improve the financial security of millions of small investors who were irrevocably damaged when Chinese markets collapsed.