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Soaring rates of 'shadow banking' add to fears of Chinese debt, warns World Bank

Fears that the steep growth of shadow banking could trigger a debt crisis in China have been highlighted by the World Bank.

In its October report on the East Asian and Pacific economies, the Washington-based financial institution cited Chinese debt levels, and specifically "shadow banking" as one of the greatest threats to regional prosperity. These activities were “creating additional vulnerabilities in the financial sector,” the institution said.

The three most representative shadow banking activities; entrusted loans, trust loans, and bankers’ acceptances, had "soared from under 7pc of GDP in 2005 to over 31pc of GDP in 2016," the World Bank warned.

This finding comes as the World Economic Forum has also issued warnings that credit in China’s financial system is building in a similar fashion to that seen in the US before the financial crisis.

Shadow banking, which the People’s Bank of China defines as “credit intermediation involving entities and activities outside the regular banking system,” has been variously estimated to consist of between 8-80pc of GDP. Ratings agencies such as Standard and Poors and the IMF have struggled to determine what the term ought, and ought not, to include.

“It’s very difficult to separate out the shadow entities, they are so intimately related to the conventional banking system I’m almost loathe to call [them] entities. They are activities [within the system],” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics.

This hard to define relationship means that even if shadow banking activity constitutes a small part of overall banking activity, the risk it poses is systemic, as these activities share the same balance sheets.

Bad debt could be as much as 20-30pc of GDP in China, warned Ms Beamish, adding that the highly likely liquidity squeeze coming from rising global interest rates would help reveal the scale of China’s shadow banking and bad debt.

“There’s the old adage that if the tide goes out you see who’s swimming naked. Well, in China the point is if the liquidity dries up these companies won’t be able to roll over bad debts and get new loans to pay the interest on old ones.

“We’ll see which debts are bad debts. This could be a critical 18 months for China and [in] the medium term for Chinese growth,” she said.


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