NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, May 4, 2015

Mix the mainland’s red-hot stock market with its opaque shadow lending industry and the result could be a new level of risk in the mainland financial sector.

Shadow banking, a sweeping term for off-balance-sheet bank lending that ends up at trust companies or in wealth management products, is falling as a proportion of bank activity. Traditional bank lending accounted for 84 per cent of total social finance last month, up from 82 per cent in December, as off-balance-sheet lending shrank.

Yet, while the numbers are falling, increased connections with the stock market have greatly shifted the risk profile of shadow banking, according to Moody’s Investors Service.

“What we are fairly confident about is that securities companies are raising funds through what are essentially repo loans and investing in the equities market,” said Michael Taylor, managing director for credit policy at Moody’s in Hong Kong.

Leveraged bets on stocks using money borrowed from brokers, known as margin lending, are used as collateral on one-year bank loans, indirectly tying bank funding to the stock market.