What is shadow banking? Unpacking the risks for China
BEIJING — China's real estate problems have again drawn attention to the world of shadow banking and the risks it poses to the economy.
Shadow banking — a term coined in the U.S. in 2007 — refers to financial services offered outside the formal banking system, which is highly regulated.
In contrast, shadow bank institutions can lend money to more entities with greater ease, but those loans aren't backstopped in the same way a traditional bank's are. That means sudden and widespread demand for payment can have a domino effect.
On top of that, limited regulatory oversight of shadow banking makes it hard to know the actual scale of debt – and risk to the economy.
In China, the government has sought in the last few years to limit the rapid growth of such non-bank debt.
What makes the country's situation different is the dominance of the state. The largest banks are state-owned, making it harder for non-state-owned businesses to tap traditional banks for financing.
The state-dominated financial system has also meant that until recently, participants borrowed and lent money under the assumption the state would always be there to provide support — an implicit guarantee.
Estimates of the size of shadow banking in China vary widely, but range in the trillions of U.S. dollars.
China's property sector, an estimated one-fourth of the economy, lies at the intersection of shadow banking, local government finances and household assets.
Real estate companies bought land from local governments, which needed the revenue and the economic benefits of regional development. People in China rushed at the opportunity to buy their own home — or speculate on property – as prices skyrocketed over the last two decades.
«Developers were able to
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