Our in-depth, two-part evaluation of the risks posed by China’s shadow finance system concludes that should China’s GDP growth rate subside or property market slump, a host of shadow finance excesses could spark a crisis.

Retail investors remain confident about bank wealth management products (WMPs) despite growing regulatory concern and a number of high-profile defaults in recent months, according to new China Confidential survey data. 

The China Banking Regulatory Commission (CBRC) announced on Wednesday its most significant attempt yet to rein in the riskier aspects of a ballooning wealth management product (WMP) market that had Rmb7.6tn under management at the end of 2012. We think the new measures – which target the most opaque forms of WMP – may significantly affect the business of those banks which have sold a high proportion of non-principal protected WMPs (CC Mar 21, Financial China). We also think that the moves may divert funds away from the shadow financial system and into formal assets such as stocks and bonds.

Concern over the risk inherent in the wealth management product segment of the financial industry is growing. We assess risk levels in the industry.

Although it is clear that Beijing would like to rationalise the shadow finance system, it will have to move slowly for fear of creating a credit crunch.

A glance at longer-term financing for corporations in the last two months of 2012 suggests an alarming picture of credit contractions. In fact, the opposite is the case.

Growth in the shadow banking system rocketed in 2012 but a heavy reliance on wealth-management products for liquidity raises questions for 2013.

Credit and liquidity conditions should remain robust in 2013, but the rising popularity of alternative sources of financing poses increasing risks