Chinese are turning to shadow banking because of the financial crunch. (Photo : Getty Images)
Culprits of massive shadow banking are unexpectedly old women who operate with gangs to launder money. State media revealed recently that they are trying to bust large-scale operations of illegal banking activity totaling to $30 billion.
Analysts suspect that the latest report only shows a small percentage of the underground financial market in the country.
The phenomenon started in 2008 when banks stopped lending and major industries like real estate, small and medium enterprises began turning to 'gangster grannies'.
According to Michael Pettis of Peking University, "Shadow banking is the financial activity that exists outside of the formal banking sector, so it includes things like wealth management products, it includes pawn shops, and it includes a wide variety of things. But basically, it's the non-regulated part of the banking sector."
Operations of shadow banking are in the form of pawn shops, loan sharking with huge interest rates or money investment schemes unauthorized by the central bank.
Pettis also said, "If you don't address the problems, debt continues to grow, and at some point, you reach your limits and your capacity to increase credit fast enough to cover all of the losses that you've been rolling forward. When that happens, growth collapses."
The Chinese shadow banking practices are estimated to reach $5 trillion or more by international analysts, according to Xiang Songzuo, chief economist of the Agricultural Bank of China.
However, Xiang admitted that the exact figure will never be determined.
The government, at first, turned a blind eye to the growing problem but eventually had to address it and found individuals with the name Sun, a 60-year-old woman who was running a gang with over 100 customers.
Sun admitted that her clients would send her money in yuan and she would wire back in foreign currencies in offshore bank accounts using remittance services.
Sheng Songcheng of the People's Bank of China believed that instead of removing shadow banking, the government should work with the underground groups.
He said, "We need to actively lead shadow banking to develop in a positive direction and to monitor the relevant risks, so it can better serve a steady operation of finance and the development of the real economy."
