Regional banks in China’s rust-belt provinces are driving the rapid expansion of shadow banking in the country, fueling a web of informal lending that poses wider risks to the financial system, according to a study by UBS Group AG.Smaller rust-belt banks like Bank of Tangshan Co. and Baoshang Bank have been using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions, the study by analyst Jason Bedford said. Others have been using the shadow loan instruments to diversify away from lending in their struggling home provinces, exposing themselves to a much wider spectrum of Chinese corporate risk in the event of a default, according to the report.By analyzing 237 Chinese banks, many of them small and unlisted regional lenders, Bedford casts a new spotlight on underground financing and the risks it poses to the nation’s $35 trillion banking industry. Shadow loans grew almost 15 percent to 14.1 trillion yuan ($2.3 trillion) by December from a year earlier, equal to about 19 percent of economic output, he estimates.
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