The Future of Shadow Banking in China
12 Pages Posted: 27 Apr 2016
Date Written: September 15, 2015
Shadow banking in China may not be as shadowy as you think. Defined simply as loans made outside the formal banking sector, shadow banking derives a big chunk of its ante from individual investors buying so-called wealth management products, or short term bundled loans devised by banks and other financial players. The loans typically go to entrepreneurs and businesses too small to enjoy the PRC’s seal of approval. Dangers exist: Shadow banking is non-transparent and has few formal safety backstops. Financing may be overextended in some industries. Investor interest could switch off as suddenly as it turned on, leaving the financiers with no capital to lend. But the sector could also be the key to China regaining its growth momentum as it finances new business models that the State can’t. Today, though, shadow banking is at a tipping point. As some products leach into the purview of accepted practices and as government oversight begins to take hold, the days of shadow banking as China knows it may be numbered. Financing made possible through shadow banking is poised to become more mainstream — and could very well propel the country to new growth trajectories. But the next phase could also involve even more opaque practices, including derivatives and leverage. It’s time to understand what China’s shadow banking behemoth is and where it’s heading.
Keywords: Shadow banking; China
JEL Classification: G21
Suggested Citation: Suggested Citation