Shadow banking 'not biggest risk' to system

Banks' loan exposure to local governments and property developers is a far more serious and imminent threat to the mainland's financial system than shadow banking, according to Standard & Poor's.

In a report released yesterday, the credit ratings agency said shadow banking was "more a symptom than a cause" of emerging systemic risks to the country's banking sector and the wider economy.

Shadow banking, or unregulated credit offered by non-bank lenders, had grown in the country at an annual rate of 34 per cent since 2011, to reach 22.9 trillion yuan (HK$28.3 trillion) of credit at the end of last year, S&P said.

That is equivalent to 34 per cent of total loans in the banking sector and 44 per cent of national GDP last year.

The rapid rise of shadow banking and several high-profile defaults last year brought to light the risks of the underlying assets of wealth management products and trust loans, prompting regulators to raise the alarm and tighten scrutiny.

Compared with the Group of 20 most-industrialised countries and economies, where shadow banking accounted for an aggregate 111 per cent of their 2011 GDP, shadow banking is still not in a position to destabilise China's financial system because banks' capitalisation, earnings and liquidity profiles provide a "comfortable buffer" to absorb any possible hit, according to S&P.