Description
This paper aims to survey available data sources and put China’s shadow banking system
in perspective. Although bank loans still account for the majority of credit provided to China’s real
economy, other channels of credit extension are growing rapidly. The fast expansion of shadow
banking has spurred wide concerns regarding credit quality and financial stability.
Journal of Financial Economic Policy
Shadow banking in China: expanding scale, evolving structure
Tong Li
Article information:
To cite this document:
Tong Li , (2014),"Shadow banking in China: expanding scale, evolving structure", J ournal of Financial
Economic Policy, Vol. 6 Iss 3 pp. 198 - 211
Permanent link to this document:http://dx.doi.org/10.1108/J FEP-11-2013-0061
Downloaded on: 24 January 2016, At: 21:49 (PT)
References: this document contains references to 27 other documents.
To copy this document: [email protected]
The fulltext of this document has been downloaded 1004 times since 2014*
Users who downloaded this article also downloaded:
J ames R. Barth, Tong Li, Wen Shi, Pei Xu, (2015),"China’s shadow banking sector: beneficial or harmful to
economic growth?", J ournal of Financial Economic Policy, Vol. 7 Iss 4 pp. 421-445http://dx.doi.org/10.1108/
J FEP-07-2015-0043
Niloy Bose, Salvatore Capasso, Martin Andreas Wurm, (2012),"The impact of banking development
on the size of shadow economies", J ournal of Economic Studies, Vol. 39 Iss 6 pp. 620-638 http://
dx.doi.org/10.1108/01443581211274584
Peter Watkins, (2011),"Shadow banking: accounting for Canada's productivity gap", International
J ournal of Productivity and Performance Management, Vol. 60 Iss 8 pp. 857-864 http://
dx.doi.org/10.1108/17410401111182233
Access to this document was granted through an Emerald subscription provided by emerald-srm:115632 []
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Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as
providing an extensive range of online products and additional customer resources and services.
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Shadow banking in China:
expanding scale, evolving
structure
Tong Li
Federal Reserve Bank of San Francisco, Los Angeles, California, USA
Abstract
Purpose – This paper aims to survey available data sources and put China’s shadowbanking system
in perspective. Although bank loans still account for the majority of credit provided to China’s real
economy, other channels of credit extension are growing rapidly. The fast expansion of shadow
banking has spurred wide concerns regarding credit quality and fnancial stability.
Design/methodology/approach – This paper explores various data sources, provides an overview
of shadowbanking activities in China, discusses their close ties with banks and summarizes regulatory
issues. Extensive descriptive data are included to provide a comprehensive picture of the nature of
shadow banking activities in China. In particular, institutions and products are discussed in great
details.
Findings – While China’s shadowbanking systemis by no means simple, it does not (yet) involve the
extensive use of fnancial derivatives. Rather, shadow banking credit is often directly extended to the
real economy. In addition, shadowbanks are typically interconnected with commercial banks in various
ways. The expanding scale and constantly evolving structure of the shadowbanking systemhas posed
challenges for fnancial regulators.
Originality/value – This paper attempts to quantify the scale and scope of China’s shadow banking
activities and provides a consistent framework as the basis for cross-country comparison of shadow
banking systems. This is one of the frst scholarly research products that discusses the origin, nature
and risks of China’s shadow banking system in a regulatory context.
Keywords China, Banks, Loans, Shadow banking, Standard & Poor’s, Credit extension
Paper type General review
Although bank loans still account for the majority of credit provided to China’s real
economy, other channels of credit extension are growing rapidly. Credit extension
activities outside commercial banks’ balance sheets are generally referred to as shadow
banking. According to Standard & Poor’s, China’s shadow banking credit has been
growing at an annualized rate of 34 per cent since year-end 2010[1]. The fast expansion
of shadowbanking has spurred wide concerns regarding fnancial stability. This paper
provides an overview of shadow banking activities in China. The rest of the paper
proceeds as follows: Section 1 discusses the scale and scope of shadow banking
JEL classifcation – G21, G28
© All copyright reserved by the Federal Reserve Bank of San Francisco
This paper was previously issued in the Asia Focus series produced by the Federal Reserve
Bank of San Francisco. Views expressed are those of the author and are not necessarily those of
the Federal Reserve Bank of San Francisco or the Board of Governors. The author thanks Teresa
Curran, Linda True and Walter Yao for their thoughtful comments. Any errors that remain are the
author’s sole responsibility.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1757-6385.htm
JFEP
6,3
198
Journal of Financial Economic Policy
Vol. 6 No. 3, 2014
pp. 198-211
Emerald Group Publishing Limited
1757-6385
DOI 10.1108/JFEP-11-2013-0061
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activities in China. Section 2 discusses their close ties with banks and reasons behind
their rapid rise. Section 3 summarizes the range of participants and products. Section 4
lays out regulatory issues. Section 5 concludes.
1. Defning shadow banking activities in China
The defnition of shadow banking differs from country to country. According to the
Financial Stability Board (2012), “the shadowbanking systemcan be broadly defned as
the system of credit intermediation that involves entities and activities outside the
regular banking system”[2]. Market participants in China usually refer to nonbank
fnancial institutions, such as trust companies, brokerage frms, small lenders and
fnancial guarantors, as shadow banks[3]. Certain off-balance sheet and informal bank
lending is also often viewed as shadowbanking. The rationale behind this classifcation
is that these activities generally involve regulatory arbitrage and have the potential to
increase systemic risks[4]. While this paper uses this broad classifcation as the basis for
discussion, an offcial defnition for China’s shadowbanking systemdoes not exist as of
this writing.
Recent estimates of the size of shadow banking assets in China range widely, as
shown in Table I. This is mainly due to differences in the defnition and treatment of
double counting. To summarize these estimates, RMB30 trillion (USD4.8 trillion) seems
to be a reliable upper bound as of 2012[5]. This amounts to 57 per cent of gross domestic
product (GDP) or 31 per cent of bank assets. Putting these numbers in perspective, the
fnancial stability board (FSB) estimated that shadow banking assets around the world
reached USD71 trillion in 2012, which is roughly equivalent to 117 per cent of the global
GDP or half the size of banking system assets. Table II shows that shadow banking
assets were 160 per cent of the GDP in the USA, 180 per cent in euro area, 363 per cent in
the UK and 67 per cent in Japan in 2012. Therefore, the relative size of China’s shadow
banking system is still small as compared to advanced economies.
2. Shadow banking sector’s close ties to banks
While the growth of the USA shadow banking system accelerated following
deregulation in the 1980s and 1990s, the recent acceleration in China’s shadow banking
sector is a direct consequence of tightened regulation and supervision of commercial
banks following the global fnancial crisis. In 2008, Chinese authorities enacted a RMB4
Table I.
Estimates of the size of
China’s shadow banking
system
Source Date RMB trillions USD trillions
Per cent of
2012 GDP
Per cent of bank assets
a
year-end 2012
GF Securities December 17, 2012 30 4.8 57 31
Citi Research (2013) January 11, 2013 28 4.5 54 29
Barclays December 2012 25.6 4.1 49 27
Hua Tai Securities December 14, 2012 25 4.0 48 26
UBS October 16, 2012 13.7-24.4 2.2-3.9 26-46 14-25
ANZ Bank December 2012 15-17 2.4-2.7 29-33 16-18
Bank of America
Merrill Lynch
July 6, 2012 14.5 2.3 28 15
Note:
a
Total assets of large state-owned commercial banks, joint-stock commercial banks and city commercial banks
Source: Various newsletters and media reports, World Economic Outlook (October 2012), China Banking Regulatory
Commission
199
Shadow banking
in China
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trillion (USD585 billion) stimulus package. As expected, the stimulus spending spurred
bank lending signifcantly (Figure 1), which, in turn, raised concerns over the credit
quality of these new loans. In the following years, Chinese fnancial regulators
signifcantly tightened credit controls by adopting various regulatory tools. In
particular, the People’s Bank of China (PBOC) raised the bank reserve requirement
ratios 12 times in 2010 and 2011 to a record high of 21.5 per cent for large institutions in
June 2011 (Figure 2). Interest rate controls have placed an upper bound on the rates
banks can offer on deposits. Consequently, nonbank institutions and underground
lending markets have been attracting a larger share of savings with higher yields and
investing these funds in the private sector where the unmet demand for credit remains
high.
The shadow banking systems in China and the USA differ in terms of composition,
players and drivers. The US shadow banking system comprises securitized loans and
obligations, asset-backed commercial paper, repurchase agreements and money market
funds. In contrast, China’s shadow banking system includes direct credit extension by
Table II.
Shadow banking assets as
of 2012
Country USD trillions Per cent of 2012 GDP Per cent of world total
USA 26 160 37
Euro area 22 180 31
UK 9 363 12
Japan 4 67 5
Global
a
71 117 100
Notes:
a
Includes Argentina, Australia, Brazil, Canada, Switzerland, China, Chile, Hong Kong,
Indonesia, India, Japan, South Korea, Mexico, Russia, Saudi Arabia, Singapore, Turkey, UK, US, South
Africa and euro area; these 20 jurisdictions and euro area cover roughly 80 per cent of global GDP and
90 per cent of global fnancial system assets
Sources: FSB (2013); World Economic Outlook (October 2013)
Source: People’s Bank of China
15.1
16.1
18.8
31.7
19.9
15.8
15.0
0
5
10
15
20
25
30
35
'06 '07 '08 '09 '10 '11 '12
YoY growth of RMB loans, %
Figure 1.
Post-crisis growth of bank
credit, 2006-2012
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nonbank fnancial institutions (especially trust companies and brokerage frms) and
informal securitization through the pooling of proceeds from wealth management
products provided by banks. China’s shadow banking system is by no means simple in
structure but is not dominated by complex derivatives.
China’s shadow banking activities typically involve direct lending to the real
sector[6], and shadowbanks are also closely tied to commercial banks. Trust companies,
for example, rely heavily on banks to obtain funding, as they cannot accept retail
deposits. Banks are also allowed to hold controlling shares in trust companies. Another
example is direct company-to-company lending, where large, state-owned enterprises
obtain bank loans at low interest rates and then lend the funds to private small- and
medium-sized enterprises (SMEs) that are in need of credit[7]. Consequently, the quality
of bank loans can deteriorate if state-owned enterprises suffer losses due to SME
defaults.
In the past, shadow banking supplemented traditional banking activities to fulfll
needs that could not be met in the tightly regulated fnancial markets in China. Nonbank
fnancial institutions were especially important to fostering private entrepreneurship in
the 1990s and 2000s. However, the rapid post-crisis growth of shadowbanking activities
has raised concerns that banks are escaping effective supervision by extending credit
off-balance sheet and nonbanks’ lending activities are not subject to suffcient bank-like
supervision.
3. Participants and products
3.1 Wealth management products as a source of funding
Issuance of wealth management products (WMPs) has been a major source of funding
that has fueled the rise in shadow banking credit. The recent emergence of WMPs is
driven by investors’ quest for higher yield. As Figure 3 shows, real deposit rates were
negative for more than half of the time in post-crisis years. Consequently,
higher-yielding alternative investments like WMPs have become increasingly attractive
for depositors. According to the China Banking Regulatory Commission (CBRC), total
Source: People’s Bank of China
10
12
14
16
18
20
22
24
Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11
Percent of deposits
Large financial institutions
Medium-and small-sized
financial institutions
Figure 2.
Reserve requirement
ratios, 2010-2011
201
Shadow banking
in China
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outstanding WMPs issued by banking institutions reached RMB7.1 trillion (USD1.1
trillion) at year-end 2012, a 55 per cent increase from 2011[8].
CBRC data indicated that banks issue the majority of outstanding WMPs, which are
marketed as products that are exempt from restrictions on deposits rates. Trust
companies, insurance companies, brokerage frms and private equity funds can also be
issuers. Issuers often pool the proceeds from various WMPs to be invested in a wide
range of assets. The underlying assets include liquid, relatively safe investments, such
as money market and bond funds, but can also include illiquid, risky credit-related
assets, including SME loans, real estate loans and local government fnancing vehicle
(LGFV) loans[9]. Asset-backed WMPs closely resemble collateralized debt obligations
in structure and can be viewed as informal securitization. Investors are usually not able
to identify assets underlying each individual asset-backed WMP. Moreover, consistent
credit ratings for WMPs issued by different banks or invested in different types of assets
do not exist. A secondary market for these products does not exist either. Not
surprisingly, investors are often confused by the opacity of these products. Figure 4
provides an example of how asset-backed WMPs are constructed.
WMPs are usually of short maturity – ?60 per cent of bank-issued WMPs issued in
2012 mature in three months, as shown in Figure 5. When issuing short-term WMPs,
banks have the fexibility to move assets and liabilities on- and off-balance sheet by
choosing the start- and end-dates of WMPs. Banks maintain a low average deposit
balance to avoid high reserve requirements. Meanwhile, banks are also able to comply
with regulatory requirements on loan-to-deposit ratios, as most funds invested in WMPs
are automatically transferred to time deposit accounts by the end of each month or
quarter. This behavior is refected in the rising volatility in bank deposits in recent
years, as shown in Figure 6. Because the underlying assets are often of much longer
maturities, issuers need to roll over WMPs on a continuous basis to maintain a positive
cash fow.
Note: Real deposit rate is calculated as benchmark nominal interest rate minus CPI
Sources: People’s Bank of China, Chinese National Bureau of Statistics
?4.5
?3.0
?1.5
0.0
1.5
3.0
4.5
2008 2009 2010 2011 2012
Percent
Figure 3.
One-year real deposit rate
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Bank-issued
WMPs
.
.
.
.
.
.
WMP (1)
Fund
pool
.
.
WMP (2)
.
WMP (N)
Asset pool
……
Trust products
Real estate
loans
LGFV loans
Bonds
Repurchase
agreements
Private equity funds
Figure 4.
An illustration of
asset-backed wealth
management products
Source: CNBenefit
Up to 1
month
5%
1-3 month
55%
3-6 month
25%
6 month-
1 year
13%
Above 1 year
2%
Not specified
This paper aims to survey available data sources and put China’s shadow banking system
in perspective. Although bank loans still account for the majority of credit provided to China’s real
economy, other channels of credit extension are growing rapidly. The fast expansion of shadow
banking has spurred wide concerns regarding credit quality and financial stability.
Journal of Financial Economic Policy
Shadow banking in China: expanding scale, evolving structure
Tong Li
Article information:
To cite this document:
Tong Li , (2014),"Shadow banking in China: expanding scale, evolving structure", J ournal of Financial
Economic Policy, Vol. 6 Iss 3 pp. 198 - 211
Permanent link to this document:http://dx.doi.org/10.1108/J FEP-11-2013-0061
Downloaded on: 24 January 2016, At: 21:49 (PT)
References: this document contains references to 27 other documents.
To copy this document: [email protected]
The fulltext of this document has been downloaded 1004 times since 2014*
Users who downloaded this article also downloaded:
J ames R. Barth, Tong Li, Wen Shi, Pei Xu, (2015),"China’s shadow banking sector: beneficial or harmful to
economic growth?", J ournal of Financial Economic Policy, Vol. 7 Iss 4 pp. 421-445http://dx.doi.org/10.1108/
J FEP-07-2015-0043
Niloy Bose, Salvatore Capasso, Martin Andreas Wurm, (2012),"The impact of banking development
on the size of shadow economies", J ournal of Economic Studies, Vol. 39 Iss 6 pp. 620-638 http://
dx.doi.org/10.1108/01443581211274584
Peter Watkins, (2011),"Shadow banking: accounting for Canada's productivity gap", International
J ournal of Productivity and Performance Management, Vol. 60 Iss 8 pp. 857-864 http://
dx.doi.org/10.1108/17410401111182233
Access to this document was granted through an Emerald subscription provided by emerald-srm:115632 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for
Authors service information about how to choose which publication to write for and submission guidelines
are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as
providing an extensive range of online products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee
on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive
preservation.
*Related content and download information correct at time of download.
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Shadow banking in China:
expanding scale, evolving
structure
Tong Li
Federal Reserve Bank of San Francisco, Los Angeles, California, USA
Abstract
Purpose – This paper aims to survey available data sources and put China’s shadowbanking system
in perspective. Although bank loans still account for the majority of credit provided to China’s real
economy, other channels of credit extension are growing rapidly. The fast expansion of shadow
banking has spurred wide concerns regarding credit quality and fnancial stability.
Design/methodology/approach – This paper explores various data sources, provides an overview
of shadowbanking activities in China, discusses their close ties with banks and summarizes regulatory
issues. Extensive descriptive data are included to provide a comprehensive picture of the nature of
shadow banking activities in China. In particular, institutions and products are discussed in great
details.
Findings – While China’s shadowbanking systemis by no means simple, it does not (yet) involve the
extensive use of fnancial derivatives. Rather, shadow banking credit is often directly extended to the
real economy. In addition, shadowbanks are typically interconnected with commercial banks in various
ways. The expanding scale and constantly evolving structure of the shadowbanking systemhas posed
challenges for fnancial regulators.
Originality/value – This paper attempts to quantify the scale and scope of China’s shadow banking
activities and provides a consistent framework as the basis for cross-country comparison of shadow
banking systems. This is one of the frst scholarly research products that discusses the origin, nature
and risks of China’s shadow banking system in a regulatory context.
Keywords China, Banks, Loans, Shadow banking, Standard & Poor’s, Credit extension
Paper type General review
Although bank loans still account for the majority of credit provided to China’s real
economy, other channels of credit extension are growing rapidly. Credit extension
activities outside commercial banks’ balance sheets are generally referred to as shadow
banking. According to Standard & Poor’s, China’s shadow banking credit has been
growing at an annualized rate of 34 per cent since year-end 2010[1]. The fast expansion
of shadowbanking has spurred wide concerns regarding fnancial stability. This paper
provides an overview of shadow banking activities in China. The rest of the paper
proceeds as follows: Section 1 discusses the scale and scope of shadow banking
JEL classifcation – G21, G28
© All copyright reserved by the Federal Reserve Bank of San Francisco
This paper was previously issued in the Asia Focus series produced by the Federal Reserve
Bank of San Francisco. Views expressed are those of the author and are not necessarily those of
the Federal Reserve Bank of San Francisco or the Board of Governors. The author thanks Teresa
Curran, Linda True and Walter Yao for their thoughtful comments. Any errors that remain are the
author’s sole responsibility.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1757-6385.htm
JFEP
6,3
198
Journal of Financial Economic Policy
Vol. 6 No. 3, 2014
pp. 198-211
Emerald Group Publishing Limited
1757-6385
DOI 10.1108/JFEP-11-2013-0061
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activities in China. Section 2 discusses their close ties with banks and reasons behind
their rapid rise. Section 3 summarizes the range of participants and products. Section 4
lays out regulatory issues. Section 5 concludes.
1. Defning shadow banking activities in China
The defnition of shadow banking differs from country to country. According to the
Financial Stability Board (2012), “the shadowbanking systemcan be broadly defned as
the system of credit intermediation that involves entities and activities outside the
regular banking system”[2]. Market participants in China usually refer to nonbank
fnancial institutions, such as trust companies, brokerage frms, small lenders and
fnancial guarantors, as shadow banks[3]. Certain off-balance sheet and informal bank
lending is also often viewed as shadowbanking. The rationale behind this classifcation
is that these activities generally involve regulatory arbitrage and have the potential to
increase systemic risks[4]. While this paper uses this broad classifcation as the basis for
discussion, an offcial defnition for China’s shadowbanking systemdoes not exist as of
this writing.
Recent estimates of the size of shadow banking assets in China range widely, as
shown in Table I. This is mainly due to differences in the defnition and treatment of
double counting. To summarize these estimates, RMB30 trillion (USD4.8 trillion) seems
to be a reliable upper bound as of 2012[5]. This amounts to 57 per cent of gross domestic
product (GDP) or 31 per cent of bank assets. Putting these numbers in perspective, the
fnancial stability board (FSB) estimated that shadow banking assets around the world
reached USD71 trillion in 2012, which is roughly equivalent to 117 per cent of the global
GDP or half the size of banking system assets. Table II shows that shadow banking
assets were 160 per cent of the GDP in the USA, 180 per cent in euro area, 363 per cent in
the UK and 67 per cent in Japan in 2012. Therefore, the relative size of China’s shadow
banking system is still small as compared to advanced economies.
2. Shadow banking sector’s close ties to banks
While the growth of the USA shadow banking system accelerated following
deregulation in the 1980s and 1990s, the recent acceleration in China’s shadow banking
sector is a direct consequence of tightened regulation and supervision of commercial
banks following the global fnancial crisis. In 2008, Chinese authorities enacted a RMB4
Table I.
Estimates of the size of
China’s shadow banking
system
Source Date RMB trillions USD trillions
Per cent of
2012 GDP
Per cent of bank assets
a
year-end 2012
GF Securities December 17, 2012 30 4.8 57 31
Citi Research (2013) January 11, 2013 28 4.5 54 29
Barclays December 2012 25.6 4.1 49 27
Hua Tai Securities December 14, 2012 25 4.0 48 26
UBS October 16, 2012 13.7-24.4 2.2-3.9 26-46 14-25
ANZ Bank December 2012 15-17 2.4-2.7 29-33 16-18
Bank of America
Merrill Lynch
July 6, 2012 14.5 2.3 28 15
Note:
a
Total assets of large state-owned commercial banks, joint-stock commercial banks and city commercial banks
Source: Various newsletters and media reports, World Economic Outlook (October 2012), China Banking Regulatory
Commission
199
Shadow banking
in China
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trillion (USD585 billion) stimulus package. As expected, the stimulus spending spurred
bank lending signifcantly (Figure 1), which, in turn, raised concerns over the credit
quality of these new loans. In the following years, Chinese fnancial regulators
signifcantly tightened credit controls by adopting various regulatory tools. In
particular, the People’s Bank of China (PBOC) raised the bank reserve requirement
ratios 12 times in 2010 and 2011 to a record high of 21.5 per cent for large institutions in
June 2011 (Figure 2). Interest rate controls have placed an upper bound on the rates
banks can offer on deposits. Consequently, nonbank institutions and underground
lending markets have been attracting a larger share of savings with higher yields and
investing these funds in the private sector where the unmet demand for credit remains
high.
The shadow banking systems in China and the USA differ in terms of composition,
players and drivers. The US shadow banking system comprises securitized loans and
obligations, asset-backed commercial paper, repurchase agreements and money market
funds. In contrast, China’s shadow banking system includes direct credit extension by
Table II.
Shadow banking assets as
of 2012
Country USD trillions Per cent of 2012 GDP Per cent of world total
USA 26 160 37
Euro area 22 180 31
UK 9 363 12
Japan 4 67 5
Global
a
71 117 100
Notes:
a
Includes Argentina, Australia, Brazil, Canada, Switzerland, China, Chile, Hong Kong,
Indonesia, India, Japan, South Korea, Mexico, Russia, Saudi Arabia, Singapore, Turkey, UK, US, South
Africa and euro area; these 20 jurisdictions and euro area cover roughly 80 per cent of global GDP and
90 per cent of global fnancial system assets
Sources: FSB (2013); World Economic Outlook (October 2013)
Source: People’s Bank of China
15.1
16.1
18.8
31.7
19.9
15.8
15.0
0
5
10
15
20
25
30
35
'06 '07 '08 '09 '10 '11 '12
YoY growth of RMB loans, %
Figure 1.
Post-crisis growth of bank
credit, 2006-2012
JFEP
6,3
200
D
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o
a
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e
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b
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nonbank fnancial institutions (especially trust companies and brokerage frms) and
informal securitization through the pooling of proceeds from wealth management
products provided by banks. China’s shadow banking system is by no means simple in
structure but is not dominated by complex derivatives.
China’s shadow banking activities typically involve direct lending to the real
sector[6], and shadowbanks are also closely tied to commercial banks. Trust companies,
for example, rely heavily on banks to obtain funding, as they cannot accept retail
deposits. Banks are also allowed to hold controlling shares in trust companies. Another
example is direct company-to-company lending, where large, state-owned enterprises
obtain bank loans at low interest rates and then lend the funds to private small- and
medium-sized enterprises (SMEs) that are in need of credit[7]. Consequently, the quality
of bank loans can deteriorate if state-owned enterprises suffer losses due to SME
defaults.
In the past, shadow banking supplemented traditional banking activities to fulfll
needs that could not be met in the tightly regulated fnancial markets in China. Nonbank
fnancial institutions were especially important to fostering private entrepreneurship in
the 1990s and 2000s. However, the rapid post-crisis growth of shadowbanking activities
has raised concerns that banks are escaping effective supervision by extending credit
off-balance sheet and nonbanks’ lending activities are not subject to suffcient bank-like
supervision.
3. Participants and products
3.1 Wealth management products as a source of funding
Issuance of wealth management products (WMPs) has been a major source of funding
that has fueled the rise in shadow banking credit. The recent emergence of WMPs is
driven by investors’ quest for higher yield. As Figure 3 shows, real deposit rates were
negative for more than half of the time in post-crisis years. Consequently,
higher-yielding alternative investments like WMPs have become increasingly attractive
for depositors. According to the China Banking Regulatory Commission (CBRC), total
Source: People’s Bank of China
10
12
14
16
18
20
22
24
Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11
Percent of deposits
Large financial institutions
Medium-and small-sized
financial institutions
Figure 2.
Reserve requirement
ratios, 2010-2011
201
Shadow banking
in China
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9
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6
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outstanding WMPs issued by banking institutions reached RMB7.1 trillion (USD1.1
trillion) at year-end 2012, a 55 per cent increase from 2011[8].
CBRC data indicated that banks issue the majority of outstanding WMPs, which are
marketed as products that are exempt from restrictions on deposits rates. Trust
companies, insurance companies, brokerage frms and private equity funds can also be
issuers. Issuers often pool the proceeds from various WMPs to be invested in a wide
range of assets. The underlying assets include liquid, relatively safe investments, such
as money market and bond funds, but can also include illiquid, risky credit-related
assets, including SME loans, real estate loans and local government fnancing vehicle
(LGFV) loans[9]. Asset-backed WMPs closely resemble collateralized debt obligations
in structure and can be viewed as informal securitization. Investors are usually not able
to identify assets underlying each individual asset-backed WMP. Moreover, consistent
credit ratings for WMPs issued by different banks or invested in different types of assets
do not exist. A secondary market for these products does not exist either. Not
surprisingly, investors are often confused by the opacity of these products. Figure 4
provides an example of how asset-backed WMPs are constructed.
WMPs are usually of short maturity – ?60 per cent of bank-issued WMPs issued in
2012 mature in three months, as shown in Figure 5. When issuing short-term WMPs,
banks have the fexibility to move assets and liabilities on- and off-balance sheet by
choosing the start- and end-dates of WMPs. Banks maintain a low average deposit
balance to avoid high reserve requirements. Meanwhile, banks are also able to comply
with regulatory requirements on loan-to-deposit ratios, as most funds invested in WMPs
are automatically transferred to time deposit accounts by the end of each month or
quarter. This behavior is refected in the rising volatility in bank deposits in recent
years, as shown in Figure 6. Because the underlying assets are often of much longer
maturities, issuers need to roll over WMPs on a continuous basis to maintain a positive
cash fow.
Note: Real deposit rate is calculated as benchmark nominal interest rate minus CPI
Sources: People’s Bank of China, Chinese National Bureau of Statistics
?4.5
?3.0
?1.5
0.0
1.5
3.0
4.5
2008 2009 2010 2011 2012
Percent
Figure 3.
One-year real deposit rate
JFEP
6,3
202
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Bank-issued
WMPs
.
.
.
.
.
.
WMP (1)
Fund
pool
.
.
WMP (2)
.
WMP (N)
Asset pool
……
Trust products
Real estate
loans
LGFV loans
Bonds
Repurchase
agreements
Private equity funds
Figure 4.
An illustration of
asset-backed wealth
management products
Source: CNBenefit
Up to 1
month
5%
1-3 month
55%
3-6 month
25%
6 month-
1 year
13%
Above 1 year
2%
Not specified