China's growing shadow banking sector adapts as rules tighten

New players in China's shadow banking sector are growing rapidly despite attempts to clamp down on opaque lending, taking advantage of a regulatory anomaly to prosper but also raising the risks of a build-up of debt in the slowing economy.

The authorities have sought to rein in the riskiest elements of less-regulated lending after a series of defaults, including a 4 billion yuan (HK$5 billion) credit product backed by Evergrowing Bank in September, because of the danger such debts could pose to the health of the world's second-largest economy.

And a government measure created in 2011 to capture shadow banking, total social financing, shows some success, with shadow banking contracting in the second half of this year to about 21.9 trillion yuan, according to analysis of central bank data.

But that fails to capture as much as 16 trillion yuan of financing mostly created in the past two years by firms overseen by the China Securities Regulatory Commission rather than the banking regulator, according to calculations based on third-party statistics.

When including that financing, shadow banking is roughly equivalent to more than 45 per cent of loans in the conventional banking system.

"We can observe this, but we don't have concrete statistics, so we're unclear on the scope," said Zeng Gang, director of the banking department at the Chinese Academy of Social Sciences, a think tank that advises the central government.