The People’s Bank of China is treading on dangerous ground as it clamps down on their shadow banking system. As Chinese stock markets tank, and the contagion spreads, policymakers are looking to minimize regulatory arbitrage which has allowed small and medium banks to reduce capital requirements by nearly 75%, as the size the marginal banking system continues to grow. The move by China’s authorities is the right one, the real question is, will they be able to manage such a complex and leveraged system without screwing up.
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