China Shadow Banking Sector may Hit $3.35Trl, Says Govt. Think Tank; JPMorgan’s chief China economist estimates China’s shadow banking sector is as large as 36 trillion yuan ($5.86 trillion)

October 10, 2013 Leave a comment

China Shadow Banking Sector may Hit $3.35Trl, Says Govt. Think Tank

10-09 14:23 Caijing

The figure equals to 40 percent of gross domestic products and 16 percent of total banking assets in China. China’s shadow banking sector could be valued at 20.5 trillion yuan ($3.35 trillion) at the least at the end of last year, compared with an official figure of 14.6 trillion yuan ($2.39 trillion), according to a government think tank report. The size of the shadow banking sector has been expanding quickly since 2010, said the report, released by the Chinese Academy of Social Sciences on Tuesday.The market-based estimate of 14.6 trillion yuan is so huge that it equals to 40 percent of gross domestic products and 16 percent of total banking assets in the world’s second-biggest economy, it said.

Although the shadow lending has a good reason to flourish in China, where smaller companies find it hard to get finance from largely state-backed banks and capitals controls are tight, the report said, it has enlarged liquidity risks in the market, and disturbed monetary policy.

The risks include liquidity ones generated from a mismatch between long asset maturity and short debt maturity, the firepower of which are growing as the market expands, beginning to threaten the stability of the financial system, the report said.

The possibility of debt overblown is also likely to create systematic risks while monetary policies of the central banks, including the one that pitches M2 – the broad measure of money supply — as the intermediate target, could be distorted, and thus dampening the efficiency of traditionally monetary tools, according to the report.

It admitted, though, the development of shadow banks is of essence to China’s financial system, for its role to have improved the efficiency of deposits, which have supplied the real economy with necessary liquidity buffers, and also because of its innovative methods that paves the way for the liberation of interest rate.

There is no clear definition of China’s shadow banking, but it is typically believed that the sector is made up of trust funds, wealth management products and other kinds of underground lending. Analysts’ estimates also vary over the size of the sector, ranging from as low as 2 trillion to over 30 trillion yuan ($4.9 trillion).

Trust companies and wealth management products contributed the largest proportion of the shadow banking, according to Haibin Zhu, JPMorgan’s Chief China Economist in a May research note. The two together make up about 28 percent of GDP, Zhu said.

Zhu estimates China’s shadow banking sector is as large as 36 trillion yuan ($5.86 trillion).

The CASS report highlighted regulatory risks in the trust industry, which has been booming in recent years. Both the size of trust assets and realized profits in 65 Chinese trust companies hit all times highs of 7.47 trillion yuan and 44.14 billion yuan respectively at the end of 2012, making the industry the second largest financial sector behind banks, latest data from the China Trustee Association showed.

There are still loopholes in regulation, however, the report said. For example, private investment funds remain a regulatory grey zone, where little supervision is enforced, the report warned.

Filed under Macro Trends

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