Bringing Light Upon The Shadow

A Review of The Chinese Shadow Banking Sector

With the recent economic slowdown, the Chinese model is once again being called into question. Concerns particularly center around China's dependence on a credit-led boom and the fast growing shadow banking sector as a potential source of the next global financial crisis.

In this joint report with the Fung Global Institute we put the shadow banking sector into perspective of the overall Chinese financial system and review the emerging risks of the sector in detail. We find that; despite significant need for reform, China is still starting from a position of relative strength. Taking a national balance sheet approach we show that China positive net asset position of RMB 87 TN (184% of GDP), even after accounting for all gross liabilities. We also show that widely published corporate debt/GDP ratios are inflated, as they do not take into account the vast amount of deposits held by Chinese corporates. Finally, we argue that China is a net lender to the rest of the world and that any emerging debt problem will be a domestic one without global systemic implications. 

For the shadow banking sector itself, we observe that traditional sizing, usually from a regulatory angle, does not account for significant levels of double or even treble counting. We take a "source" and "use" of funds approach to address these overlaps and size the market at RMB 31 TN, significantly lower than the outcome of a standard aggregation approach, which leads to about RMB 57 TN. We then review non-performing loans (NPLs) and run various scenarios. In our base scenario shadow banking NPLs will go up to 10%.  Even in our "disastrous" scenario NPLs will "only" go up to 24%. We then find that only 22% to 44% of such NPLs will be "transferrable" to the formal banking system and will create incremental banking NPLs of about 1.8% under our base scenario and 4.3% under our "disastrous" scenario. 

In conclusion, China's shadow banking problem is still manageable, but time is of the essence to pre-empt any escalation of shadow banking NPLs, which could have contagion effects. The current juncture represents an opportunity for a holistic solution to address the structural imbalances in the Chinese economy and financial system. This is being addressed in a separate section on policy recommendations. The paper closes with a view on the implications for the private sector, outlining an agenda for domestic peers in term of how to react to digital-enabled models in the shadow banking sector which could potentially disrupt parts of their business. It also discusses how these developments create opportunities for international competitors to compete more effectively in the Chinese market.


Andrew Sheng – Fung Global Institute Distinguished Fellow  
Christian Edelmann – Partner and Head of Global Corporate and Institutional Banking Practice, Oliver Wyman
Cliff Sheng – Partner and Head of China, Oliver Wyman
Jodie Hu – Fung Global Institute Research Analyst 





Bringing Light Upon The Shadow

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