Full article if you ' re paywalledChinese banks are increasingly reliant on funding sources that western peers used before the financial crisis , leading investors and analysts to warn that China ' s financial system could be vulnerable to a Lehman Brothersstyle collapse . Their use of volatile wholesale borrowing to fund balance sheets has particularly worried analysts , who warn that banks could be left without the stability of a broad retail deposit base and unable to raise cash when most needed . Concern over China ' s rising debt has already become widespread among investors and policymakers . These concerns have focused on banks ' declining asset quality as defaults rise but many analysts believe the bigger risk comes from the liabilities carried on bank balance sheets . The real issue isn ' t the volume of debt but rather the liabilityside ' plumbing ' that underlies the debt boom , says Jonathan Anderson , principal at Emerging Advisors Group and longtime Chinawatcher . If there ' s going to be financial crisis in China , this is where it will come from . Chinese lenders have traditionally relied on deposits from households and corporations to fund loans and other investments , providing a buffer against market turmoil . Retail deposits are stickier than funding from other financial institutions because retail customers rarely switch banks , while wage payments and corporate revenues provide a steady inflow of new deposits . That is now changing , as swift growth in loans and other debt assets outstrips growth of deposits . China ' s ratio of private sector credit outstanding to standard commercial bank deposits rose to 117 per cent at the end of March from 84 per cent at the end of 2008 , according to an FT analysis . While this ratio is still below the ratio in developed markets such as the US at 181 per cent and the EU at 178 per cent , the rapid upward trend is worrying , analysts say . Exposures are not nearly big enough today to talk about real crisis risks yet . But fast forward a few more years at the current pace and those risks will start to loom a good bit larger , says Mr Anderson . The widening gap between assets and deposit liabilities is being filled by less stable funding sources . One of these sources is interbank lending . Big banks , whose broad retail branch networks allow them to draw in plentiful deposits , lend to smaller banks with less access to deposit funding . But beyond the traditional lending between banks , another newer funding source from socalled wealth management products WMPs is causing concern . These are structured notes offering investors higher yields than those available on traditional bank deposits . Banks create WMPs in partnership with nonbank institutions such as trusts , securities companies and fund management companies . Some WMP proceeds flow directly to corporate borrowers such as real estate developers , mines and factories , but most are invested in moneymarket assets . These assets are essentially loans to banks , mostly in the form of repurchase agreements or interbank placements . Since 2009 and 2010 , we ' ve seen a significant shift . Particularly with smaller banks , we ' ve seen a greater reliance on borrowing from other financial institutions to fund their business , says Charlene Chu , senior partner and head of China banks at Autonomous Research in New York . That can be a source of volatility and problems when a financial sector starts to come under stress . The nightmare scenario is a WMP default , according to analysts , which could spark a broader run in which customers abruptly stop buying WMPs or even demand immediate redemption of products already purchased . In this scenario , moneymarket liquidity would evaporate and banks that rely heavily on wholesale funding could find themselves unable to meet deposit outflows or payouts on their own WMPs . The scenario could be reminiscent of 2008 , when the Primary Reserve Fund , a popular US moneymarket mutual fund , suffered losses on shortterm commercial paper issued by Lehman . When Primary Reserve broke the buck , marking down its shares to below the normal $ 1 pershare baseline , investors in other money market funds confronted the possibility of losses on products previously considered riskfree . As moneymarket investors withdrew en masse , these funds were forced to pull loans abruptly from banks and corporates . Mr Anderson warns of a situation in which isolated seizures among nonbank financials start to paralyse parts of the banking system as well . At that point , fears of counterparty risk grow , setting off a wave of liquidity hoarding . Even in the absence of a systemwide run on moneymarket funding , reports of problems at a specific institution could cause wholesale lenders to cut funding , much as Northern Rock in the UK found itself abandoned when counterparties began to doubt its solvency . Banks are becoming more sensitive to the risk of potential counterparty failure , which could magnify any collective reaction to negative news and trigger a sharp tightening in system liquidity , says Christine Kuo , senior vicepresident at rating agency Moody ' s in Hong Kong , where she covers financial institutions . China launched deposit insurance beginning last year that covers most bank deposits . Most WMPs , by contrast , provide no explicit guarantee . Yet much like US moneymarket funds before 2008 , most Chinese investors consider WMPs moneygood and pay little attention to fineprint disclosures about underlying assets , relying instead on the reputation of the stateowned banks that sell them . Chinese banks have struggled to extricate themselves from implicit guarantees . In 2013 , Industrial and Commercial Bank of China used its own funds to ensure payouts on a WMP that it had sold through its branches but for which it bore no legal responsibility . The moves echoed bailouts of offbalancesheet vehicles by bank sponsors like HSBC and Citibank during the financial crisis . These institutions faced pressure to shield clients from losses in order to prevent reputational damage , even though they had no legal obligation . In theory , new banking regulations under the global Basel III framework should prevent Chinese banks from relying too heavily on shortterm funding . The net stable funding ratio was added to Basel III specifically to address this vulnerability . A separate liquidity coverage ratio is meant to ensure banks hold enough easytosell assets to survive a 30 day stress period when moneymarket funding is unavailable . China ' s banking regulator has published draft regulations to implement Basel III , but the rules do not come into full effect until 2018 at the earliest . Net stable funding ratio is still years away . Today , no Chinese bank publishes their ratio . They ' re calculating it internally but they don ' t publish any ratio , so we really don ' t know what it ' s like , says Ms Kuo . End article