Shanghai skyline
Shadow banking institutions, such as those in Shanghai's financial hub, have moved into the spaces left behind by China's heavily regulated banks

The rise of China’s shadow banking sector has been thrown into sharp relief by data from the central bank showing that it now accounts for nearly one-third of aggregate financing in the world’s second-biggest economy.

Funding from trust companies and other entities in the shadow sector rose to its highest level on record and accounted for 30 per cent of the Rmb17.3tn ($2.9tn) in total credit issued last year, the People’s Bank of China said, up from a 23 per cent share of aggregate financing in 2012.

“This shows that financial institutions’ off-balance sheet business is developing relatively fast and providing strong capital support to the economy,” Sheng Songcheng, head of the PBoC’s statistical department, said on Wednesday.

The central bank reported a fall-off in new bank loans in December to Rmb482.5bn, from Rmb624.6bn in November. Jian Chang, an economist at Barclays, noted that loan demand tended to weaken at the end of each year, with last month’s decline reflecting weaker mortgage demand.

China’s shadow banking sector has helped fuel an alarming run-up in the debt owed by local governments, which have established off balance sheet vehicles to borrow money for development projects. A recent report by China’s National Audit Office estimated that local government debts had reached almost $3tn by June last year, rising 70 per cent from the previous audit conducted at the end of 2010.

Central bank concerns about potentially reckless borrowing led it to withdraw liquidity from the interbank market on two occasions in 2013, prompting increases in the cost of short-term financing.

In the first cash crunch in June, short-term interbank lending rates approached 12 per cent before the PBoC relented with emergency injections to calm the market. In the second surge last month, the seven-day bond repurchase rate rose through 9 per cent.

However, Mr Sheng noted that M2 money supply still rose 13.6 per cent for the full year, ahead of the PBoC’s target of 13 per cent.

He added that the central bank would “neither loosen or tighten money supply” in the coming year. Li Keqiang, China’s premier, recently said that the government would guarantee “adequate” liquidity for 2014.

The PBoC reported on Wednesday that China’s foreign reserves, the world’s largest, rose to a record $3.82tn at the end of December. That will put further pressure on the renminbi to continue its steady appreciation against the dollar, making Chinese manufactures more expensive overseas.

The country’s exporters are already contending with another round of wage increases. According to state media reports, average minimum wage levels rose 18 per cent last year.

Last week China officially became the world’s biggest trader of goods, pipping the US in that category for the first time.

Additional reporting by Emma Dong

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