China's shadow banks have lower lending rates than traditional banks despite serving riskier borrowers, China Beige Book data show, but that might not signal a hiccup in authorities' efforts to rein in the sector's risks.
"The general presumption is that shadow banks are lending to riskier clients, and as a result, they should have higher rates," Brian Jackson, an economist at IHS, said.
Instead, rates on non-bank loans averaged 6.31 percent in the second quarter, down 208 basis points on quarter and below traditional banks' average lending rate of 6.84 percent – the first time loan rates inverted on a national level, China Beige Book said in their advance second quarter data.
Shadow banking, or high-yield lending that largely takes place off banks' balance sheets, has come under scrutiny amid concerns it poses systemic risks as it's associated with trust and wealth management products which invested in risky assets, some of which have no revenue. Some of the trust products have defaulted or are considered at high risk of defaulting.
The sector is large; BNP Paribas estimates shadow banking is around 36.8 trillion yuan, or 68 percent of China's gross domestic product (GDP) for 2013.