Shadow banking, the nebulous web of bank and non-bank unregulated lending that creates an enormous chunk of the debt fueling the global monetary system, got a large share of the blame for the 2008 economic crisis. Now China’s unique version of shadow banking has swelled to epic proportions, creating some of the same conditions that presaged the U.S. housing crash. Although Chinese authorities have taken action to cool the jets on its red-hot shadow banking sector, the truth is much of that country’s economic success is based in its somewhat grassroots lending system. In fact, China’s shadow banking system is merely the market’s answer to Chinese government manipulation: businesses looking for capital; savers looking for higher returns.
Shadow banking as most commonly understood in the Western world is when financial institutions that do not accept consumer deposits, and thus are not regulated nor insured by the government, make loans to investors. Here is how the International Monetary Fund explains it: