China’s financial regulators are trying to head off an excess debt driven financial crisis.  To do this, they are trying to restrain credit growth.

Restraining credit growth has turned out to be very difficult.  As the PBOC observed,

Compared with traditional bank lending, the opaque nature of shadow banking products make it easier for them to bypass regulatory requirements and provide credit.

Of course, this problem would go away if China would adopt a transparency based financial system.

Shining light on the shadow banking products has a number of benefits including:

First, it makes them less attractive for investors because it ends any implicit bailout of the investors.  In exchange for disclosure, investors understand they are responsible for any losses realized.  This limits the amount of credit created in total through these products.

Second, it makes these products easier to regulate.