Shadow banking: risks lurk in the murk (2)

Bank executive Xiao sees it differently. He said some wealth management products are no more than Ponzi schemes. In some cases, long-term projects are funded by wealth management products with tenures of less than a year, or even as short as weeks.

"If the loans turn sour and the banks have no money to pay back the investors on short notice, a simple way to avoid the problem is through issuing new wealth management products to repay maturing products," said Xiao.

He warned that the current low level of non-performing loans at the nation's lenders might not tell the whole story of the financial condition of borrowers.

"Many industries have excess capacity after years of aggressive expansion, and a lot of money has become involved in property speculation," Xiao said. "Eventually, indebted companies may fall into default or hit severe cash flow problems."

Zhou Xiaochuan, the governor of the People's Bank of China, told the media at the 18th National Congress of the Communist Party of China that risks are currently under control.

"Shadow banking exists in China, just like it exists in many other countries," Zhou said. "But the nature and the scale of it is nothing compared to that of developed countries, where the problems were exposed during the financial crisis."

He went on to say, "Most of non-bank related financial activities are under supervision in China, unlike the situation in some countries, where the activities are completely unregulated. But we should stay alert about potentials risks and undertake effective supervision."

He said trust wealth management products are within the regulatory scope of his agency. The commission will strengthen its monitoring of shadow banking in a bid to fight any malpractices, he said.

The banking regulator, however, didn't dismiss the significance of the links between banks and trust companies. It's legitimate for trusts to manage assets entrusted to them by banks, Ping An Trust said in a report.