NEW players in China’s shadow banking sector are growing rapidly despite attempts to clamp down on opaque lending, taking advantage of a regulatory anomaly to prosper but also raising the risks of a build-up of debt in the slowing economy.

    Authorities have sought to rein in the riskiest elements of less-regulated lending after a series of defaults, including a 4 billion yuan (US$640 million) credit product backed by Evergrowing Bank in September, because of the danger such debts could pose to the health of the world’s second-largest economy.

    And a government measure created in 2011 to capture shadow banking, total social financing (TSF), shows some success, with shadow banking contracting in the second half of 2014 to roughly 21.9 trillion yuan, according to a Reuters’ analysis of central bank data.

    But that fails to capture as much as 16 trillion yuan of financing mostly created in the past two years by firms overseen by the China Securities Regulatory Commission (CSRC) rather than the banking regulator.

    When including that financing, shadow banking is roughly equivalent to more than 45 percent of loans in the conventional banking system.

    “We don’t have concrete statistics, so we’re unclear on the scope,” said Zeng Gang, director of the banking department at the Chinese Academy of Social Sciences.

    Shadow banking is therefore harder to regulate, he said.

    In shadow banking’s new incarnation, brokerages and fund management companies can pool retail investor funds or invest funds already gathered by a bank, acting as an intermediary rather than the actual investor.

    Shadow banking, defined as non-bank credit and off-balance sheet bank lending, is an important part of banking systems around the world. In China, it has helped smaller, private companies access credit and offered investors better returns than bank deposits.

    The central bank has said the benefits of the sector are undeniable. But it can also fund risky or unproductive investments, building up risks in the banking system. This is what authorities are trying to tackle.

    As the China Banking Regulatory Commission clamped down on trust companies and off-balance sheet lending, the sector adapted to capitalize on CSRC rules from 2008 that allowed brokerages to launch asset management subsidiaries.

    Investment consultancy Z-Ben Advisers said these units had more than tripled assets under management from 1.89 trillion yuan in 2012 to 6.82 trillion at the end of June.

    Fund management firms followed suit, growing from 100 billion yuan in 2012, the first year they were allowed, to 2 trillion at the end of June.(SD-Agencies)