Many people are worried about shadow banking, finance which exists outside of regulated banks, in China. Fitch, the rating agency, has raised alarms about its growing presence in the country and critics cite countless examples of seemingly risky and irresponsible lending in warning that a financial crisis looms.
Whether shadow banking really is a worrying danger or merely evidence of a maturing financial system depends on its magnitude and risk profile. Various estimates indicate that the sector has doubled its share of new credit from about 20 per cent in 2008 to 40 per cent by June 2013, at which point it accounted for roughly a quarter of the outstanding credit stock.
Meanings of shadow banking vary but a useful definition for risk assessment purposes would include only systemically important activities linked to the formal banking sector, such as wealth management products, bankers’ acceptances, trust products and entrust loans while omitting marginal forms of lending. Estimates that are in line with this definition place shadow banking at about 50-60 per cent of GDP or about 25-30 per cent of banking assets. The Financial Stability Board estimates that shadow banking represents 117 per cent of GDP and 52 per cent of banking assets worldwide, more than double their respective levels in China, where the concerns are more about the rapid growth of the sector rather than its overall size.
