China economist predicts Beijing will now encourage 'shadow' lending to boost growth

  • Shadow banking refers to activities performed by financial firms outside the formal banking sector, and therefore subject to lower levels of regulatory oversight and higher risks.
  • There have been worries that such practices may mask the risk that banks and other financial entities take on, leading some to claim that shadow banking in the Chinese economy could eventually lead to a financial crisis if the bubble pops.

After tamping down on shadow banking in the last few years, China will now likely encourage such lending to boost economic growth, a Chinese economist told CNBC on Monday ahead of the country's annual parliamentary session.

"The top agenda of (the) NPC this year is to design policies to prevent further decline (of growth rate)," said Xiang Songzuo, professor at Renmin University in Beijing, referring to the National People's Congress, which kicks off on Tuesday.

"I think this year, regulators will encourage more shadow banking financing, particularly to the private sector," said Xiang, who was previously a deputy director at the People's Bank of China and chief economist at the Agricultural Bank of China.

Shadow banking refers to activities performed by financial firms outside the formal banking sector, and therefore subject to lower levels of regulatory oversight and higher risks.

According to Xiang, Chinese officials have moved from talking about cutting debt to stabilizing the economy.

China's GDP target last year was around 6.5 percent. Sources have told Reuters that Beijing will likely set a growth target of between 6.0 to 6.5 percent in 2019.

Shadow banking is "coming back," Xiang said. In addition to spending more on infrastructure, Beijing will also need to stimulate the economy through lending, particularly to the private sector, he added.

There have been worries that such practices may mask the amount of risk that banks and other financial entities take on, as shadow banking activities are off the balance sheets due to accounting practices.

Those debt concerns have led some to claim that shadow banking in the Chinese economy could eventually lead to a financial crisis if the bubble bursts, although Morgan Stanley has said Beijing will likely better manage the risks of people borrowing from non-official channels this time, compared to years ago.

Beijing will need to tread a tightrope as it faces the dilemma of what increased shadow lending could bring, said Xiang.

"On the one hand, they need shadow banking to finance investment; but on the other hand, they (need to) try to control the potential risks," he added.