Fear of financial risk drives China into new regulatory clampdown

China has begun clamping down on its shadow banking industry in an attempt to head off a potential financial crisis, sources told Reuters.

The new regulations issued by the State Council will strengthen rules governing off-balance sheet lending. The Peoples Bank of China will attempt to develop new methods to oversee the shadow banking sector while banks' cooperation with stock brokers and trust companies will be restricted.

The Chinese authorities hope the new rules will bring greater clarity to the role of different regulators such as the China Banking Regulatory Commission, and the China Securities Regulatory Commission.

The State Council acknowledged the benefit of the shadow banking sector, telling Reuters it was a "beneficial" and "inevitable" consequence of the country's rapid financial development.

The announcement comes as two surveys showed a slowdown in China's services sector in December.

The HSBC/Markit Economics services Purchasing Managers' Index (PMI) fell to 50.9 in December from 52.5 in November. This marks its lowest point since August 2011. Business expansion was also down to its lowest level in six months. On Friday China's National Bureau of Statistics showed a decline in service-sector growth from 56 in November to 54.6 in December.

However, a slowdown in Chinese growth had been widely expected as the country attempts to rebalance its economy through a reduction of credit expansion and a greater emphasis on consumer demand rather than exports.

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