Shadow banking now 40% of China’s GDP

Its the fastest-growing segment in China’s financial sector.

The Chinese Academy of Social Sciences estimates that shadow banking was the equivalent of 40% of China’s gross domestic product in 2012. It put the size of the shadow banking sector at US$3.35 trillion in 2012.

Shadow banking covers all shadow-lending activities from wealth management products and trusts to interbank business, finance leasing and private lending.

Fitch Ratings, however, earlier estimated China’s total credit (including various forms of shadow banking lending) could have reached 198% of China’s GDP. On the other hand, J.P. Morgan places it at 69% of GDP or US$5.9 trillion.

The differences in calculations can be explained by the opaque nature of shadow banking and a lack of regulation compared with the traditional banking system.

CASS said liquidity risks from the mismatch of shadow financing with short-term capital to fund long-term projects would become even more volatile with an expansion of shadow banking activities.

It also warned the growth of shadow financing could also make regulators’ credit-control measures less effective and may pose systematic risks to the economy.