China’s shadow banking sector is growing, according to new documents revealing a rise in the number of unlisted banks operating in the country. Well-known lenders, including several city-based firms, are engaging in complex credit schemes to avoid the country’s increasing regulations and issue more profitable loans to borrowers.
Much of the growth in China’s shadow banking industry – which many experts think could be as large as the country’s ‘official’ financial services industry – has been had by smaller banks. The loans, known as ‘shadow loans,’ are immensely profitable for banks as the Chinese economy grows and borrowers make timely repayments.
But as China’s economic growth weakens, many analysts believe that shadow loans could become a risky move for Chinese lenders. As shadow lenders tend to target a more vulnerable and risky sector of the lending market than mainstream banks, the likelihood of default in periods of slow economic growth is far greater.
Worse yet, many of China’s shadow banks operate with minimal capital, giving them little in the way of financial cushioning to prevent collapse if growth slows and loans aren’t repaid on schedule. Analysts believe that an increase in defaults could create a crisis for China’s gigantic shadow money lending market.
The Financial Times recently carried out an analysis of 10 leading shadow banks in China, all of which are unlisted. According to the analysis, the banks’ risk exposure soared over the last year as the number of borrowers likely to struggle with their repayments increased.
Most of the shadow banks operate in large cities outside China’s mainstream centres of business. The 10 banks monitored by the Financial Times had a massive increase in non-standard credit products, with trust plans and other products rising from just 14.3 per cent of total assets in 2012 to 23.3 per cent of total assets in 2013.