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Lending in the Dark

HONG KONG – The proliferation of China’s opaque, loosely regulated (or unregulated) shadow-banking system has been raising fears of possible financial instability. But just how extensive – and how risky – is shadow banking in China?

According to the China Banking Regulatory Commission, shadow banking (all credit not regulated by the same standards as conventional bank loans) increased from ¥800 billion ($130 billion) in 2008 to ¥7.6 trillion in 2012 (roughly 14.6% of GDP). Total off-balance-sheet banking activity in China – composed of credits to property developers (30-40%), local-government entities (20-30%), and small and medium-size enterprises (SMEs), individuals, and bridge-loan borrowers – was estimated to be as high as ¥17 trillion in 2012, roughly one-third of GDP.