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Direction (89–93) : Read the following passage carefully and answer the given questions.
There is a parallel universe beyond the confines of China’s banking system: shadow banking. This is where borrowers and industries, shunned by banks, look for funding. Regulators look the other way. Until the early 2000s banks accounted for nearly all lending in China, but in the past five years their share has come down to just three-fifths of all new credit. On a conservative estimate, China’s shadow financing now adds up to 40 trillion Yuan, nearly two-thirds of its GDP. Compared with advanced economies, this is modest. America’s shadow-banking sector is 1.5 times the size of its GDP. But China’s shadow assets have increased by more than 30% annually over the past three years compared with less than 10% for the rest of the world, according to the Financial Stability Board. In theory, shadow banks seek higher returns but also take care to manage risks. In practice, it often does not work out like that. China’s boom in shadow banking had an innocent enough start. In 2010, regulators reined in bank lending after the credit binge that helped lift the economy out of the global financial crisis. Projects from highways to apartment blocks were left half-finished. To see them through to completion, regulators tolerated an expansion in non-bank financial institutions. It was a work around that seemed to shift risk away from the banks yet kept credit flowing. The most prominent of the shadow lenders were trust companies, versatile institutions that could lend money and take direct stakes. Trusts charged higher rates on loans than banks and also offered higher returns to their wealthy investors (the minimum investment is 1m Yuan.) Today, they hold assets of 16 trillion Yuan, more than the insurance sector. Five years ago, Chinese shadow banking was driven mainly by companies that could not get bank loans. Now it is ordinary people looking for higher returns. It is a vicious cycle. Seeing savers’ insatiable appetite for these products banks feel compelled to create yet more and are straying, distant enough from conventional banking to offer higher rates but close enough that their customers still feel reassured. Shadow banking far from being a new kind of efficient lending, has spread hidden risks throughout the economy and regulators buying their heads in the sand harms conventional banks.
There is a parallel universe beyond the confines of China’s banking system: shadow banking. This is where borrowers and industries, shunned by banks, look for funding. Regulators look the other way. Until the early 2000s banks accounted for nearly all lending in China, but in the past five years their share has come down to just three-fifths of all new credit. On a conservative estimate, China’s shadow financing now adds up to 40 trillion Yuan, nearly two-thirds of its GDP. Compared with advanced economies, this is modest. America’s shadow-banking sector is 1.5 times the size of its GDP. But China’s shadow assets have increased by more than 30% annually over the past three years compared with less than 10% for the rest of the world, according to the Financial Stability Board. In theory, shadow banks seek higher returns but also take care to manage risks. In practice, it often does not work out like that. China’s boom in shadow banking had an innocent enough start. In 2010, regulators reined in bank lending after the credit binge that helped lift the economy out of the global financial crisis. Projects from highways to apartment blocks were left half-finished. To see them through to completion, regulators tolerated an expansion in non-bank financial institutions. It was a work around that seemed to shift risk away from the banks yet kept credit flowing. The most prominent of the shadow lenders were trust companies, versatile institutions that could lend money and take direct stakes. Trusts charged higher rates on loans than banks and also offered higher returns to their wealthy investors (the minimum investment is 1m Yuan.) Today, they hold assets of 16 trillion Yuan, more than the insurance sector. Five years ago, Chinese shadow banking was driven mainly by companies that could not get bank loans. Now it is ordinary people looking for higher returns. It is a vicious cycle. Seeing savers’ insatiable appetite for these products banks feel compelled to create yet more and are straying, distant enough from conventional banking to offer higher rates but close enough that their customers still feel reassured. Shadow banking far from being a new kind of efficient lending, has spread hidden risks throughout the economy and regulators buying their heads in the sand harms conventional banks.
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Question : 92
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