Is China about to bring shadow banking back out of the darkness to kick start its slowing economy?

One of the main themes of this year’s “two sessions” meetings of the country’s legislature and top political advisory body has been renewed support for the private sector, seen as crucial to the governments hopes of pulling the economy out if its current slump.

But the private sector, which accounts for more than 60 per cent of China’s gross domestic product (GDP) growth and creates 90 per cent of new jobs, has suffered in recent years from the government’s deleveraging campaign aimed at reducing excess debt and risky lending.

That campaign targeted so-called shadow banking practises – lending and other financial activities conducted by unregulated institutions like trust companies or brokerages, or unregulated off-balance-sheet operations by traditional banking institutions – that authorities said posed a threat to the stability of the entire financial system.

The authorities had reason to worry as the country’s debt level rose to nearly 300 per cent of its GDP at the end of 2017, a dangerous level for any country but especially so for a developing nation like China.

But there is growing recognition that the deleveraging campaign may have gone too far, eliminating legitimate funding channels as well as high risk speculative operations.

“Perhaps there were places that needed to be tackled that didn’t get dealt with, yet some major shareholders of listed companies were killed off. This is the side effect of [the government’s] policy,” said Chen Yuyu, a professor of economics at Peking University’s Guanghua School of Management, referring to business owners who struggled to find funds after informal funding channels such as shadow banking had been cut.