As the economy rapidly grew in China, demand also grew for credit, especially to companies that cannot qualify for a bank loan. “A decade ago, conventional banks, which are almost all state-owned and tightly regulated, accounted for virtually all lending in China”, but this new demand let to a accelerating growth in shadow banking in China (Jing 2014). Shadow banking refers to “a ‘system of credit intermediation that involved entities and activities outside the regular banking system'” (Liu 2014). These involved trusts and leasing companies. Shadow banking is not inherently bad as many institutions supply investors high returns and provide loans to companies which usually would not qualify from a bank loan. the government was also hesitant to completely crack down on shadow banking because it helped support rapid economic growth. (Hsu 2015) However, problems arise because these institutions do not have to follow the same government regulation. For example, shadow banks do not have to carry as much capital as government regulated banks. (Elliott 2015) Shadow banks can also invest in over produced aspects of the economy, like steel and real estate, which regulated banks have been encouraged to slow down investment.
Recent problems with shadow banking has emerged as the housing bubble has begun to burst in recent years. Even as the government tries to crack down on shadow banks, like trusts, “money is flowing to other, less closely watched intermediaries. ‘Shadow banking in China looks like a cat-and-mouse game,’ declares Liu Yuhui, chief economist of GF Securities, a brokerage house” (Jing 2014). As economic growth is slowing, some trusts have defaulted. Furthermore, experts claim “a sharp downturn in some sectors could cause trouble for shadow banks, leading to a broader financial mess” (Jing 2014). A lot of China’s shadow banks have invested in real estate. Therefore, as the real estate bubble begins to burst, people are worried the effect is could have on the shadow banking industry and what effects it could have on the economy as a whole.
Hsu, Sara. “The Rise and Fall of Shadow Banking in China.” The Diplomat. Web. 15 Mar. 2016.
Jing, Jiang. “Battling the Darkness.” The Economist 10 May 2014. The Economist. Web. 15 Mar. 2016.
Lee, Justina. “China’s Shadow Banking Evolves to Dodge Crackdown.” Bloomberg.com. N.p., n.d. Web. 15 Mar. 2016.
Liu, Xiangmin. “Shadow Banking in China.” Banking & Finance Law Review 30.1 (2014): 127–135. Print.