BEIJING • China's shadow banking could lead to losses of US$375 billion (S$511 billion), according to brokerage firm CLSA's estimates of likely levels of bad debt.

The brokerage estimated that the potential bad debt ratio for "bank-related shadow financing" was at 16.4 per cent, or 4.2 trillion yuan (S$859 billion), in a report released to the media in Hong Kong yesterday. Assuming a 40 per cent recovery rate left a potential loss of 2.5 trillion yuan.

"Shadow financing is banking reform gone wrong given that the key driver of growth has been the banks circumventing regulations to protect their margins," analyst Francis Cheung wrote in the report.

"Shadow financing has grown rapidly, benefiting from implicit government guarantees despite being a channel for credit to higher-risk industries."

The report was a follow-on from CLSA estimates in May that bad debt on banks' regular loan books could be at least nine times higher than the official numbers, with potential losses of more than US$1 trillion.

Non-performing loans stood at 15 per cent to 19 per cent of outstanding credit last year, said Mr Cheung, who is the firm's head of China and Hong Kong strategy.

Potential losses ranged from 6.9 trillion yuan to 9.1 trillion yuan, according to the CLSA report.

Shadow financing - including loans facilitated by trust firms, banks' wealth management products and asset management plans sold by securities, insurance and mutual fund firms - expanded at an annual 30 per cent pace from 2011 through last year to reach 54 trillion yuan, or 79 per cent of China's gross domestic product, CLSA estimated.

While China's shadow-financing system is smaller and less complex than in developed markets, challenges include poor disclosure that hampers retail investors' assessment of risks, the analysts said.

The nation's debt-to-gross domestic product ratio may blow out to 321 per cent in 2020 from 261 per cent in the first half of this year, assuming a 6.5 per cent annual economic growth rate, CLSA said.

BLOOMBERG