1 Wang, “Three Big Questions and the Most Important Chart,” UBS Macro Keys, January 2014.

2 That China’s debt is relatively high is not particularly surprising for a country with such a high savings rate and a bank-dominated financial system, both of which are traits associated with high debt.

3 Kenneth Ho et al., “The China Credit Conundrum: Risks, Paths and Implications,” Goldman Sachs Portfolio Strategy Research, July 2013,

4 Giovanni Dell’Ariccia, Deniz Igan, Luc Laeven, and Hui Tong, “Policies for Macrofinancial Stability: Dealing With Credit Booms and Busts,” IMF Staff Discussion Note 12/06, June 2012,

5 Martin Kessler and Arvind Subramanian, “Is the Renminbi Still Undervalued? Not According to New PPP Estimates,” Peterson Institute for International Economics RealTime Economic Issues Watch, May 2014,

6 Ho et al., “The China Credit Conundrum.”

7 Christopher Towe, “World Economy: Outlook and Risks,” International Monetary Fund, October 2013,

8 Stijn Claessens, Simeon Djankov, and Lixin Colin Xu, “Corporate Performance in the East Asian Financial Crisis,” World Bank Research Observer, February 2000.

9 Jay Bryson, “Does China Have a Debt Problem?” Wells Fargo Special Commentary, September 2013,

10 World Bank, “Rebuilding Policy Buffers, Reinvigorating Growth,” World Bank East Asia and Pacific Update, October 2013.

11 “State Council Urges to Cut 80m Tons of Steel Capacity in 5 Years,” China Council for International Cooperation on Environment and Development, October 25, 2013,

12 Ryan Rutkowski, “Will China Finally Tackle Overcapacity?” Peterson Institute for International Economics China Economic Watch, April 2014.

13 Viktor Hjort, Nishant Sood, and Gaurav Singhal, “Leveraged China,” Morgan Stanley Asia Credit Strategy, May 2013.

14 Quoted in Huang, “China’s Productivity Challenge,” Wall Street Journal, August 2013,

15 Ho et al., “The China Credit Conundrum.”

16 Andrew Batson, “Fixing China’s State Sector,” Paulson Institute Policy Memoranda, January 2014,

17 Andrew Batson, “How to Fix China’s State Sector,” Gavekal Dragonomics China Research, March 2014.

18 Ho et al., “The China Credit Conundrum.”

19 “Government Bailout Plan for Private Solar Company Sparks Controversy,” Xinhua News, July 2012.

20 Keith B. Richburg, “Some See China’s Future in Debt-Ridden City of Wenzhou,”Washington Post, October 2011,

21 Thomas Gatley and Chen Long, “Defaults Are Coming—Where, When and How,” Gavekal Dragonomics, April 2014.

22 “China Xuzhou Zhongsen Missed Bond Coupon Payment: 21CBH,” Bloomberg News, April 2014.

23 “China Gets First Onshore Bond Default as Chaori Misses Payment,” Bloomberg News, March 2014.

24 Ho et al., “The China Credit Conundrum.”

25 Mark Williams, Julian Evans-Pritchard, and Qinwei Wang, “How Big a Problem Is Local Government Debt?” Capital Economics China Watch, November 2013.

26 Zhang and Barnett, “Fiscal Vulnerabilities and Risks From Local Government Finance in China,” IMF Working Paper WP/14/4, January 2014.

27 Arthur Kroeber, “After the NPC: Xi Jinping’s Roadmap for China,” Brookings Institution, March 2014,

28 Batson, “How to Fix China’s State Sector.”

29 “Moody’s Warns on China’s Local Government Debt,” Xinhua News, June 2013; “China’s Ticking Debt Bomb,” Knowledge@Wharton, April 2014; Gordon G. Chang, “$3.9 Trillion of Local Gov Debt in China… and Counting,” Forbes, September 2013.

30 In January the National Development and Reform Commission gave explicit support to such rollovers, particularly those replacing short-term bank and shadow bank loans with long-term bonds, asserting that they are preferable to leaving projects half finished. See Moran Zhang, “China to Allow Deeply Indebted Local Governments to Issue New Bonds, Repay Maturing Debt,” International Business Times, January 2014.

31 Yinqiu Lu and Tao Sun, “Local Government Financing Platforms in China: A Fortune or Misfortune,” IMF Working Paper WP/13/243, October 2013.

32 Chenggang Xu, “The Fundamental Institutions of China’s Reforms and Development,” Journal of Economic Literature, 2011.

33 Jun Ma, “Hidden Fiscal Risks in Local China,” Australian Journal of Public Administration (2013): 282.

34 “The Decision on Major Issues Concerning Comprehensively Deepening Reforms in Brief,” China Daily, November 16, 2013.

35 Shannon Tiezzi, “Re-evaluating Local Officials Key to China’s Reforms,”Diplomat, December 2013.

36 Another reason to not be particularly concerned about underground lending is that it has not changed much from the pre-global financial crisis status quo. Goldman Sachs’s estimates of informal lending activity have hovered between 7 and 10 percent of GDP since 2002, did not spike up dramatically following the crisis, and have actually been trending downward since 2011. Goldman Sachs, “China Banks—Casting Light on Shadow Banking,” Goldman Sachs Equity Research, February 2013.

37 Ideally shadow banking would be measured entirely from the asset side (trust loans, entrust loans, bankers’ acceptance bills, etc.) or entirely from the liability side (WMPs, trust products, etc.) to ensure consistency and minimize double counting. However, data constraints make such an approach impractical and would end up omitting some relevant forms of credit extension through shadow banking. This is a conservative definition that allows for some double counting to ensure comprehensive coverage and is likely to be an overestimate.

38 Nikolaos Panigirtzoglou, Matthew Lehmann, and Jigar Vakharia, “How Scary Are China’s Shadow Banks?” J.P. Morgan Global Asset Allocation, January 2014.

39 “Wealth Products Threaten China Banks on Ponzi-Scheme Risk,” Bloomberg News, July 2013,

40 Suwatchai Songwanich, “Shadow Banking Poses Problems for China,”, March 2014,

41 Ho et al., “The China Credit Conundrum.”

42 Grace Zhu and Liyan Qi, “China’s Total Credit Growth Slowed in May, Despite Surge in Bank Loans,” Wall Street Journal, June 2014,

43 Janet L. Yellen, “Interconnectedness and Systemic Risk: Lessons From the Financial Crisis and Policy Implications,” speech at the American Economic Association/American Finance Association Joint Luncheon, San Diego, California, January 4, 2013,

44 Dinny McMahon and Lingling Wei, “A Partial Primer on China’s Biggest Shadow: Entrusted Loans,” Wall Street Journal, May 2014,

45 M. Rochan, “China’s Trust Assets Soar to $1.8 Trillion Despite Default Risks,”International Business Times, February 2014,

46 Shuli Ren, “Losing Faith in China’s Trusts?” Barron’s, February 2014,

47 Gabriel Wildau, “China Trust Sector Reports Slower Growth; Default Risks in Focus,” Reuters, February 2014,

48 Ibid.

49 China Trustee Association, “Main Business Data of Trust Companies (4th Quarter 2013),” February 2014,

50 Wildau, “China Trust Sector Reports Slower Growth; Default Risks in Focus.”

51 Federal Reserve Bank of San Francisco, “Shadow Banking in China: Expanding Scale, Evolving Structure,” April 2013,

52 Some portion of the assets invested in financial securities may be stocks and bonds of firms in these sectors, which could marginally increase trusts exposure to real estate, raw materials, and infrastructure. China Trustee Association, “Main Business Data of Trust Companies (4th Quarter 2013).”

53 Ibid.

54 “Property Trust Sales Drop 49% as Vicious Loop Seen: China Credit,” Bloomberg News, April 10, 2014,

55 David Keohane, “Barely Stearns in China,” Financial Times Alphaville, March 2014,

56 “Chinese Investors Call for More Transparency in Trust Products,” Bloomberg News, March 2014,

57 John Foley, “The Thrust on Trusts,” Reuters Breaking Views, February 2014.

58 Nicholas Borst, “A Step Forward for China’s Interbank Market,” Peterson Institute for International Economics, May 2014,

59 “China Trust Investors Demand Funds From ICBC After Bailout,” Bloomberg News, February 2014,

60 John Foley, “Fear and Loathing in China’s Trust Industry,” Reuters Breaking Views, February 2014,

61 “ICBC Stops Distributing Trust Products, Securities Daily Reports,” Bloomberg News, March 2014,

62 The Goldman Sachs China banking team recently ran an analysis assuming 5 percent and 10 percent NPL ratios for banks and trusts, respectively, and a 60 percent loss ratio on those NPLs. They conclude that banks and trusts could easily absorb losses of this magnitude, which only amount to 20 percent of banks’ 2013 earnings and 180 percent of trusts’ 2013 earnings. “Interbank VI: Mapping Trust Exposure—Banks Securitized 6 tn,” January 2014.

63 BIS, “II. The Global Financial Crisis,” 79th BIS Annual Report 2008/2009, June 2009,

64 Wang Tao, “Could a Trust Default Be the First Domino in China?” UBS Global Research, January 2014; Wang, “Why China Is Not Facing a Lehman Moment,” UBS Global Research, March 2014.

65 Securities firms also issue a limited number of WMPs, but the bulk of WMP activity is conducted by banks.

66 Of course, by taking those assets off of bank or securities firm balance sheets, WMPs can free up banks to make additional loans or firms to invest in a new bond issue. However, this new credit extension would still appear as new bank loans or bond issuance (or perhaps something more exotic) and that is where the new credit will be accounted for. This also illustrates one of the problems in arriving at an estimate of the size of shadow banking: bankers’ acceptances and trust products that are then purchased by a WMP will be double counted.

67 Federal Reserve Bank of San Francisco, “Shadow Banking in China.”

68 Calculated using J.P. Morgan’s 2013 data and 2009 data from Federal Reserve Bank of San Francisco, “Shadow Banking in China.”

69 Mark Williams and Qinwei Wang, “China Moves to Manage Shadow Banking Risks,” Capital Economics China Economics Update, March 2013,

70 Gao Hua Securities quoted in Ma, Cheng and Wu, “New WMP Rule: Limited Impact on Liquidity; WMP to Slow Modestly,” Goldman Sachs Equity Research, March 2013.

71 Stephen Green, “A Primer on Banks’ Wealth Management,” Standard Chartered Global Research, January 2014.

72 Standard and Poor’s, “Will Shadow Banking Destabilise China’s Financial System?” FinanceAsia, April 2013,,will-shadow-banking-destabilise-china8217s-financial-system.aspx. Ning Ma, Bowei Cheng, and Jessica Wu, “Casting a Light on Shadow Banking: Near-Term Growth; Long-Term Cap on Bank Valuations,” Goldman Sachs Equity Research, February 2013.

73 For example, when WMPs mature they are generally transferred directly into deposits at the bank. The banks strategically arrange for WMPs to mature several days before the end of the month or quarter to help them meet regulatory requirements around loan to deposit ratios, before issuing new WMPs the day after those metrics are assessed. Thus WMPs are a key element of banks’ overall strategies, particularly for the smaller listed banks for which WMPs are 15 percent of total deposits compared to 7 percent at the big four state-owned commercial banks. Green, “A Primer on Banks’ Wealth Management.”

74 However, Goldman Sachs estimates that even a worst-case scenario in which banks were forced to take all WMPs back onto their balance sheets would only lead to a manageable 0.34 percentage point deterioration in their capital adequacy ratios. Similarly, applying a 1.5 percent risk reserve for off balance sheet WMPs would only reduce profits by 2.8 percent, which would still leave China’s banks as some of the most profitable in the world. Ma, Cheng, and Wu, “Casting a Light on Shadow Banking.”

75 Federal Reserve Bank of San Francisco, “Shadow Banking in China.”

76 Xiao Gang, “Regulating Shadow Banking,” China Daily, October 2012,

77 Huang, “Non-Performing Loans of China’s Banking System,” 2007.

78 Bank for International Settlements, “Strengthening the Banking System in China: Issues and Experiences,” BIS Policy Papers, 1999; Nicholas Lardy, China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution Press, 1998).

79 Guonan Ma, “Who Pays China’s Bank Restructuring Bill?” Asian Economic Papers, January 2007.

80 The period of the bailout also coincides with China’s accession to the World Trade Organization in late 2001, which led to rapid export growth and a widening trade surplus that helped accelerate China’s growth rate between 2001 and 2007. It is difficult to disentangle the effect of the bailout from that of WTO accession, but it seems likely that the bailout process was proving successful in maintaining growth of 8 percent (as seen in 1999–2001) and that accession to the WTO was subsequently responsible for the acceleration of the growth rate after 2001.

81 “Asset-Management Companies in China: Lipstick on a Pig,” Economist, August 2013,

82 Ho et al., “The China Credit Conundrum.”

83 Ibid.

84 Louis Kuijs, “China’s Debt: Is It Really Different This Time?” RBS Top View: China, July 2013.

85 Adam Slater, “How Bad Could Bad Loans Get?” Oxford Economics Global Research, May 2014.

86 Wang Tao et al., “Bubble Trouble: Are We There Yet?” UBS Global Research, May 2014.

87 Zhiwei Zhang, Changchun Hua, Wendy Chen, “China’s Property Sector Overinvestment, Part II: The Correction Has Started” Nomura Global Research, April 2014.

88 For further information see Yukon Huang, “Do Not Fear a Chinese Property Bubble,” Financial Times A-List, February 2014,

89 Wang Tao, Harrison Hu, Donna Kwok, and Ning Zhang, “What’s New About China’s New Urbanization Plan?” UBS Global Research, March 2014.

90 Peter Cai, “Is a Labour Shortage Looming in China?” Business Spectator, February 2014,

91 Christina Larson, “The Cracks in China’s Shiny Buildings,” Business Week, September 2012,

92 Rosealea Yao and Thomas Gatley, “China Housing and Construction Review,” Gavekal Dragonomics, October 2013.

93 Ibid.

94 Li Gan, “Findings From China Household Finance Survey,” January 2013,

95 For a detailed listing of these regulations, see Sopanha Sa, “Housing Property Prices: Failing to See the Forest for the Trees,” Societe Generale Econote, April 2013,

96 Gan, “Findings From China Household Finance Survey.”

97 Sa, “Housing Property Prices.”

98 Umesh Desai and Yimou Lee, “China Property Developers Pull Down Shutters, Hoard Cash,” Reuters, September 2013,

99 Nicholas Borst, “How Vulnerable Are Chinese Banks to a Real Estate Downturn?” Peterson Institute for International Economics China Economic Watch, April 2014,

100 For more detail on the potential knock-on effects, see Borst, “How Vulnerable Are Chinese Banks to a Real Estate Downturn?”

101 Wang et al., “Bubble Trouble.”

102 Ibid.

103 Although China’s new urbanization plan anticipates slower migration to the cities than in the past decade, it intends to allow more migrants to register as urban residents, which would increase their demand for housing and other social services.

104 Michael Pettis, “Will the Reforms Speed Growth in China?” China Financial Markets, January 2014.

105 Charlene Chu, Chunling Wen, Hiddy He, and Jonathan Cornish, “Indebtedness Continues to Rise With No Deleveraging in Sight,” FitchRatings Special Report, September 2013.

106 M. K. Tang, “Is Credit Losing Its Cyclical Growth Impact?” Goldman Sachs Emerging Markets Macro Daily, May 2013.

107 These restrictions also hurt workers by making it harder to find jobs. We have argued elsewhere that this has been an especially acute problem for the rapidly growing number of college graduates who find it difficult to find appropriate work when prohibited from moving to the dynamic megacities that drive China’s economy. See Yukon Huang and Canyon Bosler, “China’s Dangerous Graduate Glut,” Bloomberg View, May 2014,

108 For more on this see Yukon Huang, “China Needs Beijing to Be Even Bigger,”Bloomberg View, September 2013,, and Huang, “Let China’s Cities Flourish Free From Central Control,” Financial Times, March 2014,

109 For more on all topics related to China’s urbanization process, see the World Bank’s new report, Urban China: Toward Efficient, Inclusive, and Sustainable Urbanization, March 2014,