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Investment Insights

July 2013

Shadow Banking in China

Shadow banking fears and financial system reform may provide opportunities in China’s banks.

A brief spike in the Shanghai Interbank Offered Rate (Shibor) and a warning from the International Monetary Fund about the risks building in China’s financial system have focused investor attention on credit creation outside the traditional banking system, or “shadow banking” as it is often called.

Non-bank credit creation has flourished in China, in large part due to regulations aimed at containing the debt-fueled fixed-asset investment growth that resulted from the government’s 2008 stimulus measures. The question now is whether this excessive credit growth will lead to financial instability and related effects for valuations globally, or whether the government can contain the risks created by unofficial lending channels and rebalance the nation’s economy to a sustainable growth framework.

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