The Reserve Bank of Australia is concerned that the rapid expansion of China’s shadow banking sector over the past decade poses a threat to financial stability.
The RBA estimates that China’s shadow banking sector currently stands at USD$7 trillion, or around 60% of GDP, after growing at an average annual rate of approximately 40% since 2009.
This means China’s shadow banking sector is far largely proportionately compared to other emerging economies, and roughly on par with developed nations such as the UK and the US.
The RBA points out that shadow banking has brought benefits to the Chinese economy, chief amongst them the provision of more innovative forms of financing to companies otherwise barred from the state-dominated banking system.
Chinese households also benefited by obtaining access to investment products that provide competitive yields, in a highly regulated financial environment that provides few investment options.
These benefits have also created problems, however, in the form of surging debt growth beyond the purview of regulatory scrutiny, riskier lending that is still inextricably linked to the Chinese banking system, as well as liquidity and maturity mismatches.
These risks have been further exacerbated by the relative inexperience of China’s retail investors, and the perception that many financial instruments such as bank wealth management products enjoy “implicit guarantees.”
Beijing is well aware of the risks associated with exorbitant debt growth via shadow banking activity, launching a crackdown on the sector over a year ago as part of a broader deleveraging campaign.
The recently merged banking and insurance regulator has also flagged a continued focus on local government and state-owned enterprise leverage, alongside concern over the rapid increase in household borrowing.
According to RBA analysts, however, Chinese regulators are still struggling to control breakneck credit growth in the economy.
“Chinese regulators have been trying to mitigate these risks for some time, but it has been a challenge to design regulations that address these risks and are not easily circumvented,” said RBA officials in the Australian central bank’s March bulletin.
In January China posted record growth in lending, which surged to 2.9 trillion yuan (approx. USD$458.5 billion) for a five-fold increase compared to the preceding month.
