China's Trophy Hunting Crackdown Won't Deter the Shadow Bankers

China’s new restrictions on companies buying foreign assets is designed to curb risk in the $40 trillion financial system. But debt raised for outbound investment is just one piece of the hefty pie that makes up the country’s leverage challenge.

While offshore investment by Chinese companies has fallen in 2017, shadow financing -- one of the biggest sources of banking debt -- remains elevated despite moves by the authorities this year to rein it in. The largely unregulated sector has swelled as investors thwarted from moving money overseas due to capital controls seek out higher returns.

To be sure, a measure of Chinese shadow financing fell for the first time in seven years at the end of June. But the crackdown on ODI is only one part of an overall debt pile which has risen to over 260 percent of gross domestic product, from 160 percent a decade ago.

— With assistance by Xiaoqing Pi

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