Smaller Chinese banks have ramped up their shadow lending activity, adding to the financial risks that threaten to trip up the world's second-biggest economy.
The 2013 results of unlisted banks, published over the past week, reveal that city-based lenders have been among the most aggressive in China in using complex credit structures to evade regulatory controls and issue higher-yielding loans.
These shadow loans ave been profitable for banks so long as growth has been strong. But as the economy weakens, they are more vulnerable to problems than ordinary loans because they connect banks to riskier borrowers, while giving them minimal capital cushions.
Chinese officials insist the financial system is safe, but economy-wide debt levels have surged over the past five years, fueled by shadow lending, and a series of small defaults in recent months have underlined the mounting strains.
A Financial Times analysis of the balance sheets of 10 unlisted banks – institutions that are leading lenders in their home cities but have limited national reach – found that their exposure to shadow credit assets soared last year.
For the 10 banks, which operate in large cities from Shijiazhuang in the north to Fuzhou in the south, investments in trust plans and holdings of other non-standard credit products climbed to 23.3 per cent of their total assets last year, up from 14.3 per cent in 2012.
This exposure dwarfs that of China's leading banks. For Chinese banks listed in Hong Kong – the biggest and best-managed of the country's lenders – non-standard credit products accounted for just 1.7 per cent of their total assets at the end of last year, according to Deutsche Bank analysts.
Large banks are dominant in China, with the four biggest banks alone controlling nearly half of the sector's assets, so the unlisted city banks are not seen by regulators as posing a systemic threat. Nevertheless, the big rise in their shadow financing figures shows that dubious lending practices, far from being confined to the margins of the economy, are spreading rapidly even within the tightly controlled banking sector.