Dangerous things can lurk in the shadows of a financial system. We know this because when the US banking system almost burnt down in 2008, the stuff in the shadows was the fire’s accelerant. The highly-leveraged, off-balance sheet vehicles loaded with securitised debt meant made the banking crisis were far worse than it would have otherwise been.
Knowing the problems that lurked in the US, the idea of shadow banking in China freaks people out. The sector seems to have grown fast, in an economy already known for its tendency for asset bubbles and bad lending. We have spent time poking around in the shadows. We believe that much of the fear is misplaced.
China’s so-called shadow banking has little to do with what happened in the US. At its broadest, shadow banking is credit extended by non-bank financial institutions. That goes on in China – via, most importantly, wealth management products. These are sold by trust companies and banks as a form of asset management. The trusts manage some Rmb10tn (US$1.6tn) for rich individuals and firms, and the banks’ WMP officially are of a similar scale (though some Rmb3tn of trust AUM is bank WMP money).