China’s Shadow Banking

 

By Private Investments Team
July 2013

The debate over the importance of and the risks posed by China’s shadow banking system to the economy seems a never-ending one and the recent sudden cash crunch in China brought “shadow banking” under the spotlight again.

Some people compare China’s shadow banking system to the subprime crisis and believe the former to be a growing tumor of China’s financial system which would eventually give rise to a run on the financial institutions, causing a collapse of the entire system. Some believe that shadow banking plays a crucial role in China’s recent developments, as a way for SMEs, which have been neglected by commercial banks, to tap credit and is a step forward in China’s reform with limited risk.

As an insider of the credit markets for SMEs in China, we feel it is important to share our insights about this issue and help our investors and friends obtain a comprehensive view about this market.

In this white paper, we will first lay out the facts about the current situation (which are often blurred by different commentators and analysts) and the formation of China’s shadow banking system in a broad sense. Based on these findings, we will then assess the financial health of China and propose to our readers why we believe the shadow banking system may pose some market risks but little systemic risks to China’s financial markets, and that the recent “cash crunch” situation in China is only a one-off event, which should be viewed as a temporary market distortion with potential consequences well under control. At the end of the paper, we shall provide Adamas’ view on the opportunities in China’s developing credit market.

Download the full report.