Shadow banking brought America to its knees, and now it’s growing like crazy in China

Shadow banking brought America to its knees, and now it’s growing like crazy in China

By Matt Phillips — April 9, 2013

Just a few years ago, the shadow banking system brought the world’s largest economy to its knees. Will it do the same to the world’s second largest? Shadow banking—essentially when companies that aren’t regulated like banks start behaving like banks—is most definitely alive and well in China. And its growth is a key reason credit ratings firm Fitch cut its default rating on yuan-denominated debt today. The rationale is pretty plain. “Risks over China’s financial stability have grown. Credit has grown significantly faster than GDP since 2009. China experienced the second-fastest expansion of credit in real terms, behind only Qatar, between end-2009 and end-June 2012. The stock of bank credit to the private sector was worth 135.7% of GDP at end-2012, the third-highest of any Fitch-rated emerging market,” Fitch analysts wrote. And that credit growth is increasingly coming outside the banking system. Here’s a chart that shows how growth in Chinese credit—tracked using a statistic called “total social financing,” or TSF—is outpacing bank lending, from JP Morgan researchers.


And the trend continues into 2013. Fitch says just 55% of the new credit created in 12 months ending in February came from banks, that’s down from 76% in 2009. “The proliferation of other forms of credit beyond bank lending is a source of growing risk from a financial stability perspective,” Fitch wrote. The most worrisome source of credit growth outside the banking system is probably the wealth management products that have cropped up in China over the last few years. Essentially, Chinese folks have gotten fed up with low yields on bank deposits. And they’ve moved to “wealth management products,” that offer a much higher yield. Essentially, they make a deposit. The wealth management firm then turns around and lends these funds out, often to dubious land developers, for a much longer term. What could possible go wrong? Clearly, everything. And with some 7.1 trillion yuan wrapped up in wealth management—that’s about 7.5% of all Chinese bank deposits—a widespread run on wealth management funds would be disastrous.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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