Asia Pacific Special Report - China Shadow Banking June 2014
In recent years domestic banks in China have turned more cautious towards lending to the real estate sector and bank loans have become increasingly difficult to obtain. As a result, more developers are seeking alternative sources of financing to fund their growth and expansion. One option is to raise debt through the shadow banking market.
The shadow banking system in China encompasses a collection of non-bank financial intermediaries which provide services similar to commercial banks but are not subject to the banking regulations. There are a wide range of intermediaries including underground banks, microcredit companies, off-balance sheet loans for domestic banks, private equity funds and trust products.
This system is not unique to China - the largest shadow banking markets are the United States and United Kingdom – but it is expanding at a tremendous rate, growing by 42% in 2012 alone.
Due to the recent slowdown in the residential market, defaults are starting to emerge. Xingrun Real Estate in Zhengjiang, Zhejiang has been the most high-profile victim to date, leaving a total of RMB 3.5 billion of unpaid debt. These recent events have prompted talk of:
- whether there will be more default cases?
- how these will impact the overall real estate market?
- whether they will have a knock-on effect on the already slowing economy in China?
This paper will examine these issues and discuss the implications for the China real estate market.