China's 'shadow banking' sector valued at $5.4 trillion

SHANGHAI (AFP) - China's vast "shadow banking" sector is now valued at US$4.4 trillion (S$5.4 trillion), according to the government's premier research group the Chinese Academy of Social Sciences (CASS) as it warned of potential risks to the financial system.

Shadow banking in China encompasses a huge network of lending outside formal channels and beyond the reach of regulators, including activities by online finance platforms, credit guarantee companies and microcredit firms.

The system is worth 27 trillion yuan (S$5.4 trillion), equivalent to nearly one fifth of the domestic banking sector's total assets, according to a report by the Institute of Finance and Banking under CASS - China's highest academic research organisation in the social sciences.

The figure is slightly lower than an earlier estimate by ratings agency Moody's, which put shadow banking activities at US$4.8 trillion in 2012, more than half of the country's gross domestic product.

"What matters most is not the scale of the shadow banking system," CASS said in a statement for the launch of the report provided to AFP on Tuesday.

"Once big risks arise from the shadow banking system, they could rapidly spread to the banking segment and the real economy through the monetary and credit markets, posing systemic financial risks," it said.

China's financial markets were rocked by several debt defaults earlier this year.

In one case, a US$160 million investment product structured by Jilin Province Trust and backed by a coal firm failed to make capital and interest payments.

Separately, a US$500 million investment product structured by China Credit Trust avoided default in January after an unknown party made good on principal payments to hundreds of investors, though they did not received pledged interest.

Chinese authorities have shown tolerance towards individual defaults, calling them unavoidable, but have pledged to keep potential risks in check.

Analysts say the defaults could benefit the market in the long term by raising awareness of risk and making investors more selective.