Shadow banking risky

Stricter supervision of unofficial loan industry is needed to contain its negative effects and maintain financial stability

The recent disastrous debt crisis that hit Wenzhou city, Zhejiang province, revealed a problem that is deeply rooted in China's financial market and which challenges its stability. Shadow banking, being outside State supervision, challenges the stability of China's financial market, because its inverted-pyramid financial structure could collapse at any time if there is a problem with its supporting funds.

Shadow banking has existed for a long time, but it has grown rapidly since the beginning of this year when the State tightened control of financial supply. As the tightening did not change demand, space was left for underground financing to expand. According to Japan-based Nomura Securities, the size of China's shadow financing could amount to 8.5 trillion yuan ($1.33 trillion). Liu Jigang, a researcher from ANZ bank, estimates it could even be as high as 10 trillion yuan. These estimates may not be accurate, but they nonetheless highlight the problem of shadow banking in China.