The China Banking Regulatory Commission recently issued draft guidelines on financial risk with the shadow banking sector as one of the main concerns. In sought comments on its Comprehensive Risk Management Guidelines for Banking Financial Institutions,which emphasize the need for "comprehensive risk management guidelines for banking financial institutions to assess the correlation between the risks,examining the impact of these risks and preventing cross-border and cross-sector business risks. In June,Zhou Xiaochuan,the governor of the central bank,told an International Monetary Fund event that China would launch a series of regulatory institutional reforms to control the activities of shadow banks in order to eliminate a supervisory vacuum.

Financial market regulators have once again raised the issue of risks from the shadow banking sector,insisting that risk management needs to cover the entire financial sector. They maintain that the economic downturn has made the entire financial system more vulnerable,and in the face of increased market volatility it is imperative that regulators address the accumulated credit risks to avoid systemic risks.

In the debt financing system,the optimum projects always prefer the low-cost financing channels. Bond is the cheapest form of financing,with costs that are 1-2 percentage points lower than bank loans. Generally speaking,central government-owned companies,large state-owned enterprises,and other big companies with a good credit track record,tend to rely on issuing bonds to meet their financing needs. Bank loans are the second choice since their interest rates are also relatively low,albeit slightly higher than bonds. For most companies,bank loans are the first choice because they are easier to obtain than bonds. So banks are usually viewed as the frontline in the prevention and control of credit risks. Improvement in the risk control system would help assess the risks of all the different types of financing bodies from the biggest central government-owned companies to the smallest private businesses. However,the higher threshold for borrowing from banks often shuts the door to some enterprises and individuals who fail to meet the requirements of bank lenders and have to resort to the higher cost financing channels,such as the trust funds and asset management products,private loans,P2P platforms and other finance companies.

Frequent 'Risk Events'