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.
But Jackson noted China's weaker growth outlook is likely dampening many companies' investment plans -- borne out by the China Beige Book data showing a sharp slowdown in capital spending growth in the quarter.
"Demand for credit is falling, as are rates. Shadow banks may be more flexible in responding to this limited demand, and are lowering rates to attract more borrowers," Jackson said, adding that shadow banks may also be stepping up competition amongst themselves for remaining borrowers.
It's a view shared by the China Beige Book: "It appears that faltering investment meant non-bank lenders were needed less, and had to cut rates in response," it said in its report.
In addition, with authorities encouraging formal banks to lend to small and medium-sized enterprises, some borrowers may have shifted into the formal system, Jackson noted. It's a possibility that the data may support, with average bank lending rates up 51 basis points from the first quarter, China Beige Book data show.
Another reason shadow banking's lending rates appear to be declining may be because the China Beige Book data includes online lenders, a relatively new category on the mainland.
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China's Internet giants, including Alibaba and Tencent, have entered the financing market, with Alibaba's Yue Bao quickly becoming the mainland's largest fund product earlier this year by offering rates much higher than the around 3 percent benchmark time-deposit rate at banks.
The new offerings are able to get one up on traditional banks in much the same way e-commerce players often managed to out-compete bricks-and-mortar peers.
To be sure, it's possible that China's shadow bankers are charging lower lending rates because the usual methods of transmitting higher credit costs to higher risk borrowers simply aren't functioning.
"This quarter saw a drop in credit access across the board," the China Beige Book report noted. "However, credit again got cheaper for those firms privileged enough to access it—a telltale sign of a broken credit transmission mechanism," it said. "Credit markets continue to function poorly, a threat to the usefulness of monetary policy as well as to the economy as a whole."
Others also see problems with how China's financial system is distributing credit.
"China's banking system is not making credit available to a full range of borrowers," David Marshall, senior analyst at CreditSights, told CNBC, noting the banks tend to focus on large companies, which allows them to be relatively risk averse are still earn good profits, while the shadow sector fills in the gap for riskier borrowers.
"There's a big risk here because the banking sector is regulated, there are capital requirements, liquidity requirements that the banks have to meet," Marshall said. "The shadow banking sector much less in the way of regulation."
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter