New | China's mid-tier lenders still caught in the shadows

Shadow lending at Chinese banks may have slowed last year but many of China's mid-tier banks are not out of the woods given the amount of assets that have ended up off their balance sheets and out of regulatory sight.

Fitch Ratings estimates that an average of 25 per cent of the assets of mid-sized Chinese banks are not accounted for in on-balance-sheet loans.

That is a heap of assets that have circumvented much regulatory scrutiny at a time when the same banks are reporting high rates of bad loans on their balance sheets. China Citic Bank's non-performing loan ratio was 1.3 per cent at the end of last year.

One concern about that off-balance-sheet lending is that much of it may go to borrowers who are denied standard bank loans, said Grace Wu, a senior director at Fitch and an author of the report.

"You would assume that these would be higher-risk loans," Wu said.

As China's economy continues to slow and companies come up short on loan payments, banks will need to worry not only about the official NPL figures climbing. The funds that they have channelled as investments into often highly risky business ventures, most notably real estate and mining projects, may become an even greater concern for banks but without the same oversight as standard bank loans.