Financial analysts look at the financial risks of shadow banking from both extremes, some signal a looming collapse of China´s financial system, others claim there is not much to fear. For TripleCrisis shadow banking expert Sara Hsu explores the different kinds of financial products and their risks.
In sum, the riskiest shadow banking sectors are the trust and wealth management product markets. These are mainly risky based on the integrity of the underlying loans. Many of these loans were extended through a process of adverse selection, with high risk borrowers like local government financing vehicles showing a willingness to pay high interest rates because they have no other choice. The adverse selection issue will play out in the trust and WMP industries, while shadow banking sectors that have lent to more creditworthy customers (as in the entrusted loan sector) or priced in risk (as in the corporate bond sector) will be shielded to some extent from this fallout.
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