CHINA’S shadow banking sector continued to grow at breakneck speed in 2013 and now ranks as the third largest in the world, a report released by the Financial Stability Board (FSB) showed Friday.

    The FSB’s report nevertheless appears to underestimate China’s sprawling shadow banking sector, although analysts said this type of debt is not yet at a level that could threaten the stability of the overall financial system.

    The country vaulted ahead in the rankings under a new, more targeted definition of shadow banking adopted by the FSB, a task force set up by G20 economies in the wake of the 2008/09 global financial crisis to improve financial regulations.

    The report comes amid a series of shadow banking defaults in China, including that of a 4 billion yuan (US$652 million) credit product backed by China Evergrowing Bank in September, which brought increased scrutiny of the industry and the risks it poses to the world’s second-largest economy.

    China’s government is now weighing new rules to tame this less-regulated, riskier type of lending, while trying to ensure that more money from the shadow banking system is invested in the real economy rather than speculative activities.

    “Among emerging markets, the size and rapid growth of shadow banking in China warrants particular attention,” the report said.

    In China, assets of “other financial intermediaries” — which exclude traditional financial institutions such as banks, pension funds and insurance companies — grew more than 37 percent year on year in 2013 to just under US$3 trillion, data released with the report showed.

    That’s a slight moderation in growth from roughly 42 percent growth in 2012, according to the FSB.

    Still, China’s growth in assets of non-bank financial intermediaries in 2013 was second only to Argentina.

    But the figures may be overly conservative.

    Shadow banking may involve up to 27 trillion yuan of assets, equivalent to one-fifth of China’s formal banking sector, according to the Chinese Academy of Social Sciences.

    The sector’s assets have grown further since that estimate to 30 trillion to 40 trillion yuan, or about 60 percent of total yuan loans by financial institutions, said Chen Xingyu, a Beijing-based banking analyst at Phillip Securities (Hong Kong) Ltd.

    The firm factors in certain shadow banking activities by traditional financial institutions such as off-balance sheet bank loans and insurance company financial products in its estimate, he said.

    Although risks are rising, Chen said if shadow banking became a threat to the banking system it would appear in rapid growth of non-performing loans at banks, which hasn’t happened yet.

    The government does not want to completely quash this riskier lending. A central bank vice governor said last month that the benefits of shadow banking to areas of the economy generally starved for financing such as small and medium enterprises were undeniable.

    (SD-Agencies)