China markets reel as banks unwind US$1.7t in shadow funds

Shanghai

A US$1.7 trillion source of inflows into Chinese markets has suddenly switched into reverse, roiling the nation's money management industry and sending local bonds and stocks to their biggest losses of the year.

The turbulence has centred on so-called entrusted investments - funds that Chinese banks farm out to external asset managers. After years of funnelling money into such investments, banks are now pulling back in response to a series of regulatory guidelines over the past three weeks that put a spotlight on the risks. Critics have blamed entrusted managers for adding leverage to China's financial system and reducing transparency.