By its very definition, shadow banking is obscure, shrouded in secrecy, and difficult to discern. It is even harder to define shadow banking in China, where the official system is itself opaque and uncertain, an area where actual procedure is often diverges significantly from the rules. Shadow banking is usually a combination of financial instruments available on markets outside of the traditional banking system, but this does not mean that banks are not involved. They can carry out shadow banking operations, or even act as primary players, even though two principal differences are maintained. Safety margins are in fact tighter, while checks by the authorities are increased – at least on paper. The system serves to ensure credit to companies and individuals who do not have access to the usual means of financing. The funds can be used to launch an investment, buy stock, repay debts, and sometimes even for personal reasons, like supporting a gambling habit. The financial instruments of shadow banking are varied and not easily defined; they run the gamut from sophisticated finance to outright usury. The most prevalent and more easily classified are managed by China’s 67 trust companies who, free from a coherent legislation, issue loans without actually accepting deposits. Even greater is the volume of entrusted loans, transactions between companies where the bank acts only as a caretaker of the funds, and of the guarantees. Other widespread instruments are informal lending and the management of large private holdings via WMP, or Wealth Management Products. The financing is often short term and with very high interest rates: from 12 to 30% annual rate for a standard period of six months. Despite these conditions, shadow banking has reached enormous proportions in China, although still relatively smaller when compared to the west. The numerical figure attributed to shadow banking varies in relation to where one draws the line when defining the term. The Economist estimates 17,500 billion yuan, Moody’s 20,500 billion yuan, and JP Morgan 36,000 billion yuan, equal to an unbelievable 69% of China’s GDP, and the number continues to rise as the financial market in neighboring Hong Kong is dragged into the mix. The extent of these figures launches two important signals: the persistent inclination of the Chinese towards investments, and the deficit of efficiency in the official banking system. Shadow banking is just a symptom of a more widespread disease. The most recent macroeconomic indicators in China show a slow down in growth, with inflation dipping and remaining stable. The conditions for an expansive monetary action are there, but Prime Minister Li Keqiang has ruled out that possibility in the near future. Li stated that spending stability and rationality are irrefutable cornerstones. The danger of new inflows of money being diverted towards sectors and uses that are unwelcome by the government is very high. The increase in empty houses and the nightmare housing bubble after the first cash injection in 2009 bear witness to that. It is better therefore not to loosen the purse strings, in the belief that their role is subrogated by a more and more powerful shadow banking, possibly an alliance.
