The Booming of a Shadow Banking System in China

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The Booming of a Shadow Banking System in China

Photo: dpa

Originally appeared at DWN, translated by John T. Sumner exclusively for SouthFront

China’s shadow banks are busy to expand their influence regarding the domestic financial markets. Last year alone, funding under their maintenance spiraled upwards by almost a third. According to some estimations, capital to the tune of 80 percent of China´s overall economic output would circulate within this shady market.

Shadow banks seem to fulfill an increasingly important role within the Chinese financial system. According to the American rating agency Moody’s, assets managed by them have increased by about 30 percent in 2015. How Moody’s has been able to reckon these figures, remains unclear because the shadow banking system mostly takes place outside the established banking and hardly ever becomes subject to regulation by the state.

According to Moody’s, shadow banks managed around 7.3 trillion euros in 2015 – which corresponds to about 78 percent of the total GDP of China, equaling about 27 percent of all bank deposits. In 2011, this figure was still around 17 percent.

The government in Beijing considers this sector a threat to the financial stability and has been trying for some time to regulate the chaotic market and to prohibit risky transactions. “But despite these efforts, the share of shadow banks in lending and in capital contribution has rapidly expanded because companies with poor solvency rather turn to alternative sources of funding and because investors are always busy striving for higher returns”, Reuters writes.

“The increase in debt and the expansion of shadow banking activities are also raising the financial risks in general. Due to the networking with ordinary commercial banks, the risk of infection is quite high for these institutions, ” Moody’s wrote.

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