The Lujiazui Forum 2013 is being held in Shanghai from June 27 to June 29. Yan Hong, Deputy Director at Shanghai Advanced Institute of Finance with Shanghai Jiao Tong University says the shadow baking system to some extent supplements the existing banking system. What shadow banks are doing, such as micro-loans or some other similar business, should be carried out by the current banking system.

The following is a script of his speech:

Yan Hong:

The shadow baking system to some extent supplements the existing banking system. What shadow banks are doing should be carried out by the current banking system, but not yet.

Shadow banks are doing such things. People don’t have many choices for investment, and that is a major reason for shadow banking’s development.

But shadow banking is no evil in essence. It supplements a lot to our existing financial system.

We need to speed up the marketization of interest rates. Some of the things being done by shadow banks come as a result of the insufficient marketization of interest rates.

Changes are needed to the reward and punishment mechanism of China’s banking system. Otherwise, incentive mechanism will be twisted. Domestic banks would do things they shouldn’t, only to benefit foreign banks and financial institutions.