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.

The term “shadow banking” gained prominence during the subprime mortgage crisis in the United States to account for non-bank assets in the capital market, such as money-market funds, asset-backed securities, and leveraged derivative products, usually funded by investment banks and large institutional investors. In 2007, the volume of shadow-banking transactions in the US exceeded that of conventional banking assets.

The Financial Stability Board has estimated that total global shadow-banking assets in 2011 amounted to $67 trillion, with the US accounting for $23 trillion, the eurozone for $22 trillion, and the United Kingdom for $9 trillion. Chinese shadow banking totals only about $2.2 trillion.