Skip to content
Subscriber Only

China's Next Crisis Lurks in Shadow Banking

Some $5.86 trillion in unsupervised lending hangs over the economy
The Jin Mao Tower, center left, and the Oriental Pearl Tower, center right, as seen from the Shanghai World Financial Center
The Jin Mao Tower, center left, and the Oriental Pearl Tower, center right, as seen from the Shanghai World Financial CenterPhotograph by Tomohiro Ohsumi/Bloomberg

China’s growing reliance on shadow banking is contributing to its debt problem. Since 2010 the value of the unregulated loans, investments, and other financial products of this sector has almost doubled, to as much as 36 trillion yuan ($5.86 trillion). That’s equal to 69 percent of gross domestic product, says Haibin Zhu, chief China economist at JPMorgan Chase in Hong Kong. “Shadow banking poses systemic risks,” warned Moody’s in a May 13 report.

The question is how much of this capital carries an implicit guarantee that the national government must cover. “It is our belief that at some point the central government will have to take responsibility for local debt,” says Derek Ovington, head of regional banks in Asia at CLSA Asia-Pacific Markets. The official debt burden of central and local government, which does not take the localities’ shadow banking activities into account, is just below 30 percent of GDP, Moody’s says. In contrast, Ovington estimates that shadow banking liabilities and consumer, corporate, and government debt are now more than 200 percent of GDP. “The longer the government takes to address this, the bigger the problem becomes.”