The mainland's formal banking sector is "significantly exposed" to the shadow banking system, a source of growing risk to the stability in the world's second-largest economy, Fitch Ratings says.
About 80 per cent of new shadow credit is tied to banks on the mainland, and an even bigger proportion of outstanding shadow loans is linked to mainstream lenders, said Charlene Chu, Fitch's head of China financial institutions.
Shadow banking credit - credit offered by non-bank lenders - was singled out by Fitch as one of the contributors to China's rapid credit expansion over the past few years, and prompted the ratings agency to downgrade China's long-term local-currency debt rating to A-plus from AA-minus on Tuesday.
China has experienced world's the second-fastest expansion of credit, behind only Qatar, over the past three years, according to Fitch. Total credit in the economy, including loans made in the shadow banking sector, has likely surged from 125 per cent of gross domestic product at the end of 2008 to 198 per cent at the end of last year, Fitch said.
Official data showed only 55 per cent of new social financing took the form of bank lending in the 12 months to February, down from 76 per cent in 2009, illustrating the increasing importance of the shadow banking system.
"In the vast majority of shadow banking transactions, various banks are involved in some way," Chu said. "Either [there are] original bank loans that are getting refinanced through [shadow banking], or a bank is helping a borrower access credit through [those] channels, or simply trying to push things off the bank's balance sheet so they can be in compliance with the required loan-to-deposit ratio.
"Because of all sorts of ties between banks and shadow credit channels, banks will not be immune to problems in the shadow banking sector," she said.
Ratings agency Standard and Poor's said shadow banking credit has grown on the mainland at an annual rate of 34 per cent since 2011, to reach 22.9 trillion yuan (HK$28.3 trillion) at the end of last year - or 34 per cent of all loans in the banking sector.
The rise of shadow banking and several high-profile defaults last year brought to light the risks to the assets that underlie wealth management products and trust loans, prompting regulators to sharpen their scrutiny.
Mainland banks are now faced with mounting risk from defaults by borrowers saddled with overcapacity and their ties with shadowing banking, regulators and analysts say.