Talk of a Chinese shadow banking crisis is on the rise, leaving many investors in the U.S. and elsewhere wondering: What exactly does that mean?
Shadow banking is unregulated, high-yield lending that largely takes place off banks' balance sheets. China's central bank wants to restrain risks related shadow banking in that country, but has shown little interest in shutting it down entirely.
Fears about China's banking system have flared recently because of a financial product known as a wealth management product, or WMP, that was widely expected to default this week until an 11th-hour agreement resolved the situation. This particular WMP has a three-year maturity and was supposed to bring a return of between 9.5 percent and 11 percent—far above the 3 percent deposit rate banks are paying. The initial principal investment was roughly $500 million.