Rapid expansion of shadow-banking activities is a major concern for China, as it could not only affect the development of the country’s property market, but could also be bad news for individual investors, according to RBC Wealth Management report.
The report says that the biggest areas of shadow banking in China are the trust sector, which accounts for around one-third of assets, and certain bank wealth management products, which constitute another one-third of assets.
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The report attributed the key reason for the growth in trust financing in recent years to the government’s decision to severely restrict bank lending to the property sector and to local governments in 2010.
About 75% of trust assets in China are passive (25% are active), with active trusts growing more quickly. With passive trusts, the trust distributes capital which someone else has raised, to borrowers, whereas with active trusts, the trust company does everything, including raising and managing the funds. The concern is whether the sector is being sufficiently regulated and monitored, said the report.
Wealth management products are a key concern in shadow banking, added the report. Banks often partner with a trust to provide money to a third party and, in doing so, create a product for sale. This involves pooling loans to firms, dividing them up, and then selling them on to individuals.
The size of the market for shadow banking wealth management products was estimated to be US$1.2 trillion in 2012. If and when things do go wrong and investors get burned, there is likely to be widespread public outcry, the report warned.
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