The rise of the shadow banking system in the U.S. has arguably been one of the more profound developments in the financial industry over the last decade or so. No one doubts that the rise of this system has in many ways pushed the industry beyond the realm of strong regulation, as it sprawls in ways that make it hard for overseers to keep pace.

Are we seeing the seeds of similar shadow banking in China? The Financial Times notes that as China officially tightens its monetary policy, more small and medium-sized businesses are turning to shadow lenders in the form of big non-bank companies. Local media reports that 64 listed non-financial companies had issued loans this year as of the end of August, up 38.2 per cent from last year. Of these companies, 35 lent at rates higher than the standard bank rate, with the highest at a 24.5 per cent annualized rate.

The kicker is that most of these shadow lenders are state-owned companies. They are officially being allowed to earn more on their cash than they could ifthey were simply to deposit the money. However, there are some risks as well. These aren't necessarily the safest credit risks. This may strike some as a bit rococo. But compared to our shadow financial system, it still has a ways to go.

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