China Securities Journal reports that Beijing is aiming for a 13% growth in the board measure of money supply, M2, next year as it keeps stimulus spending going to support the economic rebound. That would imply the highest level of bank lending in four years. New bank loans would rise to 8.5 trillion yuan ($1.4 trillion) from 2012’s 8.2 trillion yuan.
What those numbers don’t count is the financing coming out of the shadow banking system. Beijing has a measure for total credit extended to the economy, total social financing, which includes the shadow banking system. It doesn’t make any public forecasts of what that number might be in 2013, mostly so as not to frighten the horses.
It may just not know. Private estimates range from the shadow banking system being two-thirds the size of the formal banking system to three times as large.
Shanghai Securities News estimates that one of its fastest growing sectors, loans by trusts, which are quasi-hedge funds, rose to 1.3 trillion yuan in 2012, up from 201.3 billion in 2011. The rise has been fueled by newly rich Chinese looking for higher returns than they can get from the regular bank deposit accounts, and the willingness of banks to market so-called wealth management products to their better heeled customers often via trusts.
The worry about the explosive increase in shadow bank lending is that so much of it falls in into regulatory grey areas, particularly trust-bank loans, loans packaged by trusts, sold by banks and often backed by local governments as a way to get round Beijing’s scrutiny of the special investment vehicles they used to use for back-door borrowing off their books. In such murkiness, potentially bad loans can flourish.
There have been a series of defaults and near-defaults around these in the past month. None catastrophic but taken together they raise a red flag. So far China’s local government debt bomb hasn’t gone off. The rapid growth of shadow banking gives it more time.