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By Jake Spring
BEIJING (Reuters) - China's shadow banking sector continued to grow at breakneck speed in 2013 and now ranks as the third largest in the world, a report released by the Financial Stability Board showed on Friday.
The FSB's report nevertheless appears to underestimate China's sprawling shadow banking sector, although analysts said this type of debt is not yet at a level that could threaten the stability of the overall financial system.
The country vaulted ahead in the rankings under a new, more targeted definition of shadow banking adopted by the FSB, a task force set up by G20 economies in the wake of the 2008/09 global financial crisis to improve financial regulations.
The report comes amid a series of shadow banking defaults in China, including that of a 4 billion yuan (407.78 million pounds) credit product backed by China Evergrowing Bank in September, which brought increased scrutiny of the industry and the risks it poses to the world's second-largest economy.
China's government is now weighing new rules to tame this less-regulated, riskier type of lending, while trying to ensure that more money from the shadow banking system is invested in the real economy rather than speculative activities.
"Among emerging markets, the size and rapid growth of shadow banking in China warrants particular attention," the report said.
In China, assets of "other financial intermediaries" - which exclude traditional financial institutions such as banks, pension funds and insurance companies - grew more than 37 percent year-on-year in 2013 to just under $3 trillion (1.88 trillion pounds), data released with the report showed.
That's a slight moderation in growth from roughly 42 percent growth in 2012, according to the FSB.
Still, China's growth in assets of non-bank financial intermediaries in 2013 was second only to Argentina.
But the figures may be overly conservative.
Shadow banking may involve up to 27 trillion yuan of assets, equivalent to one-fifth of China's formal banking sector, according to the Chinese Academy of Social Sciences.
The sector's assets have grown further since that estimate to 30 trillion to 40 trillion yuan ($4.91 trillion to $6.54 trillion), or about 60 percent of total yuan loans by financial institutions, said Chen Xingyu, a Beijing-based banking analyst at Phillip Securities (Hong Kong) Limited.
The firm factors in certain shadow banking activities by traditional financial institutions such as off-balance sheet bank loans and insurance company financial products in its estimate, he said.
To rein in the sector, China's banking regulator published draft rules in August aimed at strengthening oversight of financing activities including securities firms and trust companies and such products as entrusted loans and wealth management products.
"The trend as we have seen it in the last four or five years is not sustainable, as in China cannot see another three or four years of credit growth at that pace," said Louis Kuijs, chief China economist at Royal Bank of Scotland.
"However, when taking a step back and looking at this whole system, looking at what it would mean for overall financial risk, for overall macroeconomic stability, then I would still feel comfortable saying I don't feel China is at the risk of systemic financial crisis because of (shadow banking)."
Although risks are rising, Chen said if shadow banking became a threat to the banking system it would appear in rapid growth of non-performing loans at banks, which hasn't happened yet.
The government does not want to completely quash this riskier lending. A central bank vice governor said last month that the benefits of shadow banking to areas of the economy generally starved for financing such as small and medium enterprises were undeniable.
Under the broadest measure of non-bank financing, China's share of global shadow banking quadrupled between the end of 2007 and 2013 to 4 percent, the report showed.
The broad measure shows that shadow banking assets in developed countries continue to dwarf China's both in absolute terms and as percentage of GDP.
Global non-bank financial intermediation grew by $5 trillion in 2013 to reach $75 trillion.
The United States and Euro area each account for roughly one-third of global shadow banking, followed by Great Britain with a 12 percent share and Japan's 5 percent.
But a narrower metric for shadow banking introduced in this year's report reveals that China had the third-largest shadow banking sector behind the U.S. and UK in 2013. That figure strips out non-bank financial activities that aren't necessarily shadow banking and therefore carry less risk.
The global shadow banking industry grew 2.4 percent to $35 trillion in 2013 under the narrower measure.
(Reporting By Jake Spring; Editing by Ki
By Jake Spring
BEIJING (Reuters) - China's shadow banking sector continued to grow at breakneck speed in 2013 and now ranks as the third largest in the world, a report released by the Financial Stability Board showed on Friday.
The FSB's report nevertheless appears to underestimate China's sprawling shadow banking sector, although analysts said this type of debt is not yet at a level that could threaten the stability of the overall financial system.
The country vaulted ahead in the rankings under a new, more targeted definition of shadow banking adopted by the FSB, a task force set up by G20 economies in the wake of the 2008/09 global financial crisis to improve financial regulations.
The report comes amid a series of shadow banking defaults in China, including that of a 4 billion yuan (407.78 million pounds) credit product backed by China Evergrowing Bank in September, which brought increased scrutiny of the industry and the risks it poses to the world's second-largest economy.
China's government is now weighing new rules to tame this less-regulated, riskier type of lending, while trying to ensure that more money from the shadow banking system is invested in the real economy rather than speculative activities.
"Among emerging markets, the size and rapid growth of shadow banking in China warrants particular attention," the report said.
In China, assets of "other financial intermediaries" - which exclude traditional financial institutions such as banks, pension funds and insurance companies - grew more than 37 percent year-on-year in 2013 to just under $3 trillion (1.88 trillion pounds), data released with the report showed.
That's a slight moderation in growth from roughly 42 percent growth in 2012, according to the FSB.
Still, China's growth in assets of non-bank financial intermediaries in 2013 was second only to Argentina.
But the figures may be overly conservative.
Shadow banking may involve up to 27 trillion yuan of assets, equivalent to one-fifth of China's formal banking sector, according to the Chinese Academy of Social Sciences.
The sector's assets have grown further since that estimate to 30 trillion to 40 trillion yuan ($4.91 trillion to $6.54 trillion), or about 60 percent of total yuan loans by financial institutions, said Chen Xingyu, a Beijing-based banking analyst at Phillip Securities (Hong Kong) Limited.
The firm factors in certain shadow banking activities by traditional financial institutions such as off-balance sheet bank loans and insurance company financial products in its estimate, he said.
To rein in the sector, China's banking regulator published draft rules in August aimed at strengthening oversight of financing activities including securities firms and trust companies and such products as entrusted loans and wealth management products.
"The trend as we have seen it in the last four or five years is not sustainable, as in China cannot see another three or four years of credit growth at that pace," said Louis Kuijs, chief China economist at Royal Bank of Scotland.
"However, when taking a step back and looking at this whole system, looking at what it would mean for overall financial risk, for overall macroeconomic stability, then I would still feel comfortable saying I don't feel China is at the risk of systemic financial crisis because of (shadow banking)."
Although risks are rising, Chen said if shadow banking became a threat to the banking system it would appear in rapid growth of non-performing loans at banks, which hasn't happened yet.
The government does not want to completely quash this riskier lending. A central bank vice governor said last month that the benefits of shadow banking to areas of the economy generally starved for financing such as small and medium enterprises were undeniable.
Under the broadest measure of non-bank financing, China's share of global shadow banking quadrupled between the end of 2007 and 2013 to 4 percent, the report showed.
The broad measure shows that shadow banking assets in developed countries continue to dwarf China's both in absolute terms and as percentage of GDP.
Global non-bank financial intermediation grew by $5 trillion in 2013 to reach $75 trillion.
The United States and Euro area each account for roughly one-third of global shadow banking, followed by Great Britain with a 12 percent share and Japan's 5 percent.
But a narrower metric for shadow banking introduced in this year's report reveals that China had the third-largest shadow banking sector behind the U.S. and UK in 2013. That figure strips out non-bank financial activities that aren't necessarily shadow banking and therefore carry less risk.
The global shadow banking industry grew 2.4 percent to $35 trillion in 2013 under the narrower measure.
(Reporting By Jake Spring; Editing by Kim Coghill)