Lurking in the Shadows—The Risks from Nonbank Intermediation in China

One of my all-time favorite movies is “The Third Man” starring Orson Welles and Joseph Cotten. Perhaps the most striking part of the movie is the shadowy cinematography, set in post-World War II Vienna. Strangely, it springs to mind lately when I have been thinking of China. Many China-watchers looked on in 2009 as the government’s response to the global financial crisis unfolded, causing bank lending to expand by close to 20 percentage points in less than a year. At the same time, a less visible phenomenon was also getting underway. One that, like Orson Welles’ character in the movie, resided firmly in the shadows. Various types of nonbank financial intermediaries were gearing up to provide more credit. Talking to people in China, and looking at what numbers are available, one cannot help but have an uneasy feeling that more credit is now finding its way into the economy outside of the banking system than is actually flowing through the banks. This worries me for four broad reasons.