The Shadow Looming Over China

Of all the topics sure to be come up in Sino-U.S. economic talks this week -- from the problem of excess capacity to currency controls -- the health of China’s financial sector will no doubt feature high on the list. Especially worrying are the multiplying links between the country's commercial and “shadow” banks -- the name given to a broad range of non-bank financial institutions from peer-to-peer lending platforms to trusts and wealth management companies. All told, the latter now hold assets that exceed 80 percent of China’s gross domestic product, according to Moody’s -- much of them linked to the commercial banking sector in one way or another. That poses a systemic threat, and needs to be treated as such.

There’s nothing inherently wrong with shadow banks, of course. Largely owned by the government, China’s commercial banks focus primarily on directing capital from savers to state-owned enterprises, leaving Chinese households and smaller private enterprises starved for funds. Shadow banks have grown to meet the demand. At their best, they allocate capital more efficiently than state-owned lenders and keep afloat businesses that create jobs and growth.