China shadow banking fears: Overstated or justified?

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Concerns about shadow banking in China are overblown, the chairman of China Investment Corporation (CIC) which is responsible for managing some of the country's massive currency reserves, told CNBC.

"The issue of shadow banking in China has been exaggerated. Yes there are issues, but on the whole the financial system in China is sound," CIC chairman Ding Xuedong, told CNBC on the side lines of the St Petersburg International Economic Forum in Russia.

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Shadow banking refers to how financial intermediaries create credit in ways that may be overlooked by government regulation.

Often these financial instruments are highly complicated and unregulated and the growth of their use in China in recent years has raised concerns about the financial risks facing the world's number two economy.

"The shadow banking over there is potentially 2007 all over again if things don't go properly," Art Cashin, director of floor operations at UBS, told CNBC Thursday.

Read More'Shadow' could be 2007 all over again: Cashin

Two perspectives

Ding said shadow banking in China should be looked at from two perspectives.

"First some of the wealth management products are designed to provide returns to the clients on market driven rates. These are normal wealth management products," he said.

"But when you look at the other side, there are some wealth management products that were meant to circumvent normal or proper regulation and they may cause risks to the banking sector as well as China's economy as whole," Ding added. "When you look at these two perspectives, you'll see that the shadow banking issue in China is not as serious as feared. Also, the central bank has taken measures to tackle the issue."

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China's shadow banking sector is valued at $4.4 trillion, equivalent to nearly one fifth of the domestic banking sector's total assets, according to a report from Chinese think-tank the Chinese Academy of Social Sciences (CASS) earlier this month.

Last month Beijing was reported to have issued stricter rules governing trust companies to counter risks to the financial system.

Fan Gang, a prominent Chinese economist, told CNBC he did not believe China was facing a 'Lehman moment,' a reference to the collapse of U.S. investment bank Lehman Brothers in 2008, which had ripple effects throughout global financial markets.

"They're wrong," he said, replying to a question about those who say China still risks a Lehman moment in its housing sector. "The housing sector is already experiencing a correction, or an adjustment in the past three years."

Ridiculous argument

Asked about recent weakness in the Chinese , also known as renminbi, and whether there was an active policy to weaken the currency, Fan said: "This is, for me, a really ridiculous argument."

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"Say, five months ago, the renminbi was heavily overvalued. Not because of current account surpluses of China, but because of huge capital inflows," he added. "This is a good correction of this over valuation. In the long run, of course, the renminbi may still have room to appreciate."

The yuan is down roughly 3 percent against the dollar so far this year, but is up about 0.5 percent from levels hit at the end of April which were the lowest since late 2012.