Mid-tier Chinese banks piling up trillions of dollars in shadow loans

Beijing

MID-TIER Chinese banks are increasingly using complex instruments to make new loans and restructure existing loans that are then shown as low-risk investments on their balance sheets, masking the scale and risks of their lending to China's slowing economy.

The size of this "shadow loan" book rose by a third in the first half of 2015 to an estimated US$1.8 trillion, equivalent to 16.5 per cent of all commercial loans in China, a UBS analysis shows. For smaller banks, the rate is much faster.

This growing practice, which involves financial structures known as Directional Asset Management Plans (DAM…