China’s shadow banking: five numbers investors need to know

Published on 11 Sep, 2014

Many investors remain concerned about China's shadow banking, estimates of which vary widely.

Casting a dark shadow

Over the last few years, debt levels have risen significantly in China. Concurrently, shadow banking – lending by non-bank intermediaries – has also grown significantly. ‘Around 40% of new lending last year came from sources that are collectively referred to as the ‘shadow banking system’, a broad term that encompasses all forms of credit creation by non-bank intermediaries,’ State Street Global Advisors noted in a recent report.

Recent media reports suggest an increasing number of shadow banking entities are struggling to meet payments, which is fuelling worries among some investors about the impact this sector could have on the wider banking system.

Citywire Asia looks at some reports that highlight the scope and size of this little known sector.

Spreading its wings

According to recent estimates by research firm Aranca, China's shadow banking assets are estimated at $2.3–$4.5 trillion at the end of 2013, accounting for anywhere between 25% and 50% of China’s GDP.

Estimates of the sector’s size, however, vary widely: Citibank estimates shadow banking's assets at $4.5 trillion, while Bank of America Merrill estimates it around $2.3 trillion, the report noted.

Both Barclays and Moody's estimate it at $4.1 trillion, while Credit Suisse estimates it at $3.7 trillion, according to Aranca.

Finding loopholes in the system

The shadow banking system exploits regulatory grey areas to channel bank deposits into primarily wealth management products (WMPs) and trust products.

Aranca estimates that trust products contribute 35% of the total assets of the shadow banking sector, while WMPs are estimated at 24% of the sector.

In addition, debt instruments are estimated at 29%, while reports are believed to account for the balance 12%.

High exposure to high-risk sectors

One of the big concerns about shadow banking is that they are exposed to high-risk projects and industries that banks have stayed away from.

A Manulife report estimates that 35% of the top 200 trust products in 2014 and 2015 are exposed to the property sector, while 34% are exposed to local government funding vehicles. Another 14% is exposed to the coal mining sector, according to Manulife.

Manulife also said that among 24 identified cases of trust product defaults or near-defaults since 2012, ten cases resulted in bailouts by trust companies and four in bailouts by third-party investors.

Institutions most at risk

The shadow banking system is also deeply intertwined with China's wider interbank lending market.

Most trust companies and small to mid-sized banks are heavily reliant on the interbank market for funding and often have limited reserves to handle any possible default.

Small institutions such as joint-stock, city and rural banks are among the largest seller of WMPs, accounting for more than 40% of the market at the end of March 2013, according to Manulife.

The 'Big Four' state-owned banks are considred to be less at risk due to the more diversified nature of their operations.


Read more