As banks find their margins squeezed on traditional lending and payments activities, nonbank credit and financing—supported by technological innovation—is growing exponentially.
CHINA’S SHADOW BANKING EMPIRE
According to the Financial Stability Board, around 80% of shadow banking activity takes place in the US, the euro area and the UK. But many emerging countries are experiencing high growth rates. Nine emerging markets jurisdictions had 2013 growth rates above 10%.
“Other countries that are seeing a rapid growth of shadow banking are Mexico (in real estate investment trusts) and some countries in the Far East, some of them in Southeast Asia—like Malaysia and Thailand for example,” notes Laura Kodres at the International Monetary Fund.
China, which has experienced a huge expansion of shadow banking, provides a case study. China’s Total Social Financing (TSF), a statistic calculated by the People’s Bank of China that measures shadow banking, was still climbing at double-digit rates in 2014, although it had slowed down from peaks of more than 35% in 2009.
“Part of the slowdown in recent times was due to government intervention. They realized that the industry had grown too quickly and too fast,” says Winnie Chwang, co-manager of the $1 billion Matthews China fund at Matthews Asia in San Francisco.
“In the Chinese case most of the shadow banking is taking place in the form of trust companies, which are financing specific projects of property companies, energy firms or manufacturers,” Chwang says. Once securitized, these products are sold to high-net-worth individuals.
A cap to interest rates paid on Chinese deposits to investors “is really why the wealth management products in China in the shadow banking system have grown up until today,” says Chwang. “Interest rates in China are regulated by the government, and that has created an opportunity for wealth management products to offer…much higher rates of returns.” Chinese officials have said that they will deregulate interest rates paid on deposits in the future, which should help traditional banking channels. “Shadow banking in China will become smaller than it is today.”