The shadow of China

The U. S. subprime mortgage crisis of 2008 provoked a global discussion in academic and regulatory circles about the so-called “shadow banking”, the regulators of financial systems and the rapid financial liberalization and deregulation.

“Shadow banking exists alongside the formal banking system, offering similar kinds of services, but it is lightly or not regulated at all. Its institutions are therefore highly leveraged and more prone to failure or “bank runs” (for example, liquidity shocks)”, mentions Dawa Sherpa in her article in Economic & Political Weekly some years ago[1].

The very rapid economic growth of China caught by surprise the global community and researchers are wondering if the U.S. crisis of 2008, that shook the world, could be occurred again due to the lack of transparency in much off balance sheet or non-bank activity that characterizes China’s system. However, it should be mentioned that, generally, being outside the formal banking sector means there is a weaker lever of regulation, safety and, of course, financial stability and that’s the reason why shadow banking is inextricably linked to Liquidity Risk, Leverage Risk, Regulatory Arbitrage and Contagion Risks.

Shadow banking in China must be examined in a more complex system that takes into account the dominated banking system of the country, the crucial role of the state that largely controls the banks and provides directions and its sufficient restrictions[2]. According to “Global Shadow Banking Monitoring Report 2015” of Financial Stability Board (FSB), United States of America (USA), United Kingdom and China have the biggest shadow system in the world.

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Moreover, the Brookings Institution claims that two-thirds of shadow banking in China is characterized as bank loans in disguise and there can be named two categories of shadow banking instruments: (a) wealth management products and (b) entrusted loans. Banks create Wealth Management Products (WMPs) that lure investors, who are searching for higher returns than interests paid on traditional savings. Also, it is well – known that the issuers can deploy the funds as loans, or can channel them into trust companies that don’t have to play by loan-to-deposit rules[3]. The WMPs are classified by the recent press release of Fitch Ratings as “a key source of credit and liquidity risk for certain financial institutions”[4]. As for Entrusted loans, according to researchers, still represent the 15% of the country’s total financing needs and the major portion of China’s shadow banking system[5].

Another issue about the economy of People’s Republic of China is Hong Kong that hosts a significant number of trust, leasing and offshore companies, underground banks etc. The former British colony gives the opportunity to some of the shops that are labeled as “financial services” to bring to Hong Kong funds that were deposited in an associate agency in mainland China. Once they enter the famous port, are free to move on with their journey, even if there is no evidence about their break out from mainland China. This is one of the reasons why they are named “underground channels”. And, of course, there is always the option of converting yuan to Hong Kong dollar[6], one of the most traded currencies in the world[7].

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The growing shadow banking system of the second largest economy of the world is the reason why a lot of people are observing with curiosity the Chinese economy. Along with that, there is always the fear of the unknown, as shadow banking and underground economy are new phenomena, and the belief that China can be only the tip of the iceberg of a new global crisis[8]. However, the last evidence showed us a slowdown of the growth of Chinese shadow banking and revealed the two most likely future scenarios: The banks (a) to undertake shadow system or (b) to leave shadows and come to light. Furthermore, it is expected a change in the shape of the Chinese shadow banking system and an adoption of more sophisticated western practices[9]. Only time will tell what will be the future of the world economy.

This article was my optional project for the course Data Journalism Fundamentals .


[1] Dawa Sherpa, (October 26, 2013), “Shadow Banking in India and China Causes and Consequences”, Economic & Political Weekly (VOL XLVIII NO 43), pp. 113.

[2] Douglas E., Arthur K., Yu Q., (March 2015), “Shadow banking in China: A primer”, The Brookings Institution, pp. 1.

[3] Wei Jiang, (2015), “The Future of Shadow Banking in China”, Jerome A. Chazen School of International Business (white paper), pp. 6.

[4] FitchRatings, (March 7, 2016),“Fitch: Boom in WMPs a Key Risk for Some Chinese Banks”, Retrieved from https://www.fitchratings.com/site/pressrelease?id=1000589 .

[5] Wei Jiang, pp. 7.

[6] Marc Roche, (November 2011), Kapitalismos ektos nomou: H oikonomia tou paraskiniou [Le capitalisme hors la loi], Athens, Metaixmio, pp. 95 – 96.

[7] Triennial Central Bank Survey. (September 2013 ), “Foreign exchange turnover in April 2013: preliminary global results” pp. 5, Retrieved from http://www.bis.org/publ/rpfx13fx.pdf .

[8] Marc Roche, (January 2015), Oi Banksters [Les Banksters: Voyage chez mes amis capitalistes], Athens, Metaixmio, pp. 247.

[9] Wei Jiang, (2015), pp. 10 – 11.

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