Simon Rabinovitch at FT writes:
Shadow banking is flourishing in China, helping to make non-bank institutions as big a source of credit as banks themselves since July – something that has never happened before. Chinese bankers, leading rating agencies and the International Monetary Fund have all warned about risks from the surge in loosely regulated lending, with some even pointing to parallels with developed economies before the global financial crisis. But the Chinese government itself has taken a permissive stance.
Highly regulated banks restricted lending to property developers following concerns over a real estate bubble. But regulators turned a blind eye to unregulated shadow lenders who borrow short — normally no more than 3 months — and lend long. They may believe this will sustain economic growth while protecting banks from risky lending. The thinly capitalized sector, however, is at risk from defaults and a consequent liquidity crisis which could spread to the banking sector.