A Reuters report last week said China’s Evergrowing Bank may have to make good on guarantees it issued on a principal amount 3.7 billion yuan and 300 million yuan of interest dues on an off-balance sheet, wealth management product issued by one of its shareholders and an affiliate.

How the entities deployed the funds is not known, but evidently the investments have turned sour. Evergrowing Bank received funds amounting 1 billion yuan from The Bank of Tianjin and 2.7 billion yuan from Tianjin Binhai Rural Commercial Bank under this wealth management scheme. Evergrowing’s guarantees may now be invoked by these investors, as it appears that the shareholder and the affiliate are unable to repay the dues.

The incident again brings China’s ‘shadow banking’ industry into a negative focus. However, Steven Barnett and Shaun Roache of the IMF would prefer to use the term “off-balance sheet and nonbank financial intermediation” instead of “shadow banking.”

iMFdirect blog: “What’s Lurking in the Shadows of China’s Banks”

“With a name like ‘shadow banking’ it must be bad,” remark Barnett and Roache in their above blog post. “This is unfair – while the profession lacks a uniform definition, the idea is financial intermediation that takes place outside of banks—and this can be good, bad, or otherwise.”

Non-banking financial intermediation in China rests on four pillars, they say, and their respective growth between 2008Q2 and 2014Q2 is shown in the chart below:

1-china-social-financing-intermediaries Wealth Management

Evergrowing Bank’s case would fall in the ‘Bank Acceptance’ category. “These are letters of guarantee issued by a bank that its customers can use to finance a transaction. These are ‘undiscounted’ as the bank is issuing a guarantee rather than an actual loan. Once ‘discounted,’ this form of credit is recorded in bank loans,” explain the IMF authors.

Wealth management: ‘Shadow banking’ risks

According to Barnett and Roache, shadow banking is a means of getting around regulatory restrictions and increases risk by moving financial intermediation outside the more secure formal banking sector.

Investors, in a hunt for higher returns, may turn a blind eye to this risk and invest too much – which could endanger their lifetime savings.

What’s good about ‘shadow banking?’

“The expansion of nonbank intermediation marks progress in financial development,” observe the IMF authors. Besides, it makes more sources of finance available to fast-growing companies, on the one hand, and provides higher deposit earnings (beyond the regulatory ceiling) to investors, on the other.

In the chart below, the pink band represents the growth from shadow banking.

1-china-social-financing Wealth Management

In the final analysis, say Barnett and Roache, China’s shadow banking is a little bit of both – a sweet smelling flower as well as a thorny bush.