China has the capacity to manage shadow banking which is not yet a global systemic issue, U.S. Treasury Secretary Jack Lew said on Friday.
"I think we've seen China take steps over the last six months that show that they are concerned about this and they are not going to just let it continue growing without any kind of oversight," Lew said in an address in Sydney ahead of the G-20 financial ministers meeting this weekend.
"It is clearly a challenge that China has to deal with, and I think it will be one of the topics we'll talk about at the G-20 because it's a global concern," Lew said, adding that he is taking comfort from the relative small size of the China's shadow banking sector "compared to the size of the Chinese economy."
(Read more: CNBC Explains – Chinese shadow banking crisis)
Fears about China's banking system have risen recently following the failure of a high-profile shadow-banking product marketed by the world's biggest bank ICBC, prompting analysts to expect a wave of potential defaults ahead.
"Because they [shadow banking products] tend to be less transparent, less highly regulated, the risk from creating systemic exposure from them is real," Lew said. "We saw it in the financial crisis when money market funds broke the buck. And it created a series of very significant ramifications around the world."
China's shadow banking has been compared to the U.S. subprime sector, where a series of credit events in 2007-2008 ultimately triggered the global financial crisis.
On the global economic recovery, the U.S. Treasury Secretary urged major powers like Europe, China and Japan to focus on spurring domestic demand.
"United States recovery is, I think, healthy and moving very much in the right direction and picking up velocity. But it can't make up for a lack of demand in growth in the other key economies in the world," he said.
On Japan's battle against deflation, widely known as Abenomics, Lew said that the first "two arrows" in the form of monetary and fiscal policies have definitely "helped" to turnaround the decades of stagnation that have stumped the economy.
"The most recent statistics suggest the jury is out as to exactly how much impact it [Abenomics] actually had. But no doubt that it helped," Lew said. "They [Japan's policymakers] very much need to get on with the third arrow of Abenomics, which is the reforms and we have made the case that they have to be serious."
— by CNBC's Li Anne Wong. Follow her on Twitter