New | Shadow banking boom pushes China to edge of debt sustainability

Booming shadow banking growth has pushed China to the outer limits of its ability to service debt and keep its economy functioning smoothly, though spillover risks from a bursting of the credit bubble are containable, experts said on Monday.

With total leverage in the Chinese economy now topping 280 per cent of gross domestic product, it was clear that credit quality was deteriorating, Primavera Capital Group founder and chairman Fred Hu told delegates at a Fung Global Institute forum.

"It is not yet the end of the world, but it is approaching the limit of debt sustainability," Hu said.

Debt sustainability, the ability to service debts, is a key measure of solvency. Analysis by the McKinsey Global Institute earlier this year showed debt in the Chinese economy had roughly quadrupled between 2007 and the middle of last year to US$28 trillion, leaving it with a debt-to-GDP ratio more than twice that of crisis-wracked Greece.

Hu said the potential systemic risks caused by the boom in shadow banking could not be ignored, even though its emergence in China as a crucial funding source in the wake of the global financial crisis in 2008 had helped underpin economic growth.

Shadow banking in China is loosely defined as off-balance-sheet credit provided outside the formal banking system, either through special funding vehicles or trust products.