China's shadow banking activities have risen nearly 70 percent over the past two years and now total more than half the size of the world's second-largest economy, ratings agency Moody's said Monday.
Shadow banking includes private lending, off-balance-sheet vehicles and trusts, and allows borrowers to circumvent banks' formal underwriting standards, as well as official regulation.
Such lending has surged 67 percent since the end of 2010, Moody's said in a report, reaching an estimated total of 29 trillion yuan ($4.7 trillion) at the end of last year, or 55 percent of China's GDP.
The rapid growth was partly due to some borrowers having difficulties obtaining regular bank loans, according to the report, and threatened the health of the banking system and the overall economy.
"Shadow banking may encourage excessive financial leverage in the broad economy and add to credit bubble concerns," Moody's said.
"Given the substantial scale and growth of shadow banking activities in China, we are doubtful of the banks' ability to isolate themselves from a significant increase in defaults in the shadow banking domain."
China's banking regulator has sought to rein in non-transparent lending activities and in March ordered banks to step up checks on wealth management products as part of a bid to boost risk control and openness.
But Moody's said: "The impact from shadow banking on banks will depend on the amount and timing of losses and how they are allocated, variables that are difficult to assess at this point, given the lack of transparency and fast-evolving nature of shadow banking in China."