CHART: The Stunning Rise Of China's Shadow Banking System

Shanghai. Scott Halleran/Getty Images

With a name like “shadow banking” it must be bad, dark, sinister and a little bit shady.

“This is unfair,” say two International Monetary Fund experts: Steven Barnett, a Division Chief in the Asia and Pacific Department, and Shaun Roache, the IMF’s Resident Representative in Hong Kong.

The two look at the country’s shadow banking system, which feeds increasing amounts of finance to corporate China, in a new IMF blog post.

There are various names for shadow banking including “nonbank intermediation”, a phrase used in IMF’s 2014 Global Financial Sector Report.

Global interest in China’s shadow banking, and the debt flowing from it, stems mainly from its rapid growth since the financial crisis in 2008.

This is the pink part in the chart below which has more than tripled since 2008.

It also accounts for half of the increase in overall credit to the economy or total social financing, which is higher than total bank loans.

The IMF experts ask: is shadow banking a sweet smelling flower or a thorny bush?

They say both.

On the plus side, the expansion of nonbank intermediation marks progress in financial development. It benefits companies by providing alternative ways to borrow. And, it benefits households, by giving them more investment opportunities, which is especially important given the ceiling on deposit interest rates. Therein, however, also lays the thorn.

Shadow banking provides an opportunity to circumvent regulations, such as the deposit interest rate ceiling (but there are many others). For example, rather than putting money in a deposit, a bank’s customer could buy a wealth management product from the bank that offers a higher return. This wealth management product, in turn, may invest in equities and bonds but can also, subject to a limit, invest through shadow banks in assets that look a lot like bank loans.

Shadow banking moves outside of formal banking which has safeguards such as capital requirements, provisions against loan losses, loan to deposit ratios, well-established supervision and regulation.

“The regulators and supervisors are trying to keep up with this fast-moving sector, with some recent success, but it remains a huge challenge,” the IMF experts write.

However, the IMF estimates suggest China’s shadow banking sector is small compared to the rest of the world.

The experts say the IMNF’s Global Financial Stability Report to be released next month uses an estimate of 35% of GDP, as it subtracts corporate bonds (nearly 20% of GDP) from the shadow banking.

Here’s how China’s shadow banking looks compared to the rest of the world:

IMF: China’s shadow banks, while expanding fast, are still modest in size when compared internationally.

There’s more detail here.

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