BIS Publishes A "Simplified" Map Of China's Shadow Banking System

While China's shadow banking sector may have been tamed in the past year as a result of an aggressive crackdown by Beijing over the unregulated, gray-market in high interest lending and especially Wealth Management Products or WMPs, it, it still retains an aura of incomprehensibility - and thus fascination - to most market watchers.

Still, while growth of shadow credit to ultimate borrowers has slowed, the use of shadow saving instruments (eg wealth management products, trust products) has continued to expand at a fast pace. New and more complex "structured" shadow credit intermediation aimed at reducing banks' regulatory burden has emerged and quickly reached a large scale. Meanwhile, the bond market has become highly dependent on funding channeled through wealth management products. As a result, Chinese shadow banking is becoming slightly more similar to US shadow banking.

To help China watchers in their analysis of China's financial underworld, overnight the Bank of International Settlements published a working paper  mapping China's shadow banking sector, which studies the "structure of the shadow banking system in China, focusing on the main activities and linkages with the formal banking sector."

As the BIS explains in its abstract:

We develop a stylised shadow banking map for China with the aim of providing a coherent picture of its structure and the associated financial system interlinkages. Five key characteristics emerge. One defining feature of the shadow banking system in China is the dominant role of commercial banks, true to the adage that shadow banking in China is the "shadow of the banks". Moreover, it differs from shadow banking in the United States in that securitisation and market-based instruments play only a limited role. With a series of maps we show that the size and dynamics of shadow banking in China have been changing rapidly. This reveals a marked shift in the relative importance of different shadow banking activities. New and more complex "structured" shadow credit intermediation has emerged and quickly reached a large scale, while the bond market has become highly dependent on funding channelled through wealth management products. As a result, the structure of shadow banking in China is growing more complex.

This "growing complexity" of China's shadow banking system is captured neatly in the following chart:

For those pressed for time, here is the BIS conclusion:

Understanding the structure of China’s shadow banking system is crucial for analysing China’s financial system. We provide a stylised map of shadow banking in China, which highlights the main forms of shadow banking and the resulting financial system interlinkages. Shadow banking in China takes a markedly different form compared to that in the United States. A key characteristic is that commercial banks are the dominant players in China’s shadow banking system. The system is effectively a “shadow of the banks”, while securitisation and market-based instruments still play only a limited role.

We show that the structure of shadow banking in China is evolving. Its size and dynamics have changed rapidly in recent years. The main area of growth has shifted from shadow credit provision to private firms with less privileged access to formal bank credit, towards offering alternative savings instruments (eg WMPs and trust products). Similarly, at the intermediate stage, new and more complex “structured” shadow credit intermediation has emerged and quickly has reached a large scale. This is driven by banks trying to alleviate regulatory burdens (eg NPL provisions or LTD ratio ceilings) through a reclassification of existing bank assets into investment receivables. Tight and growing financial sector linkages further raise the potential for the transmission of financial shocks among savers, banks and the bond market. In addition, new forms of internet-based credit intermediation, such as P2P lending, have been expanding at an extraordinary pace. As a result, shadow banking in China is growing more complex and thereby becoming slightly more similar to the US shadow banking.

For everyone else, here is the full paper (pdf link)