, with the ratio of debt to gdp rising significantly to its current level of around 260 per cent ( graph 9 ). http : / / www. rba. gov. au / speeches / 2018 / sp - gov - 2018 - 05 - 23. html 10 / 20 5 / 25 / 2018 australia's deepening economic relationship with china : opportunities and risks | speeches | rba graph 9 this increase in the debt ratio over the past decade has been larger than in any other major economy. this can be seen in this next chart, which shows the increase in this ratio since 2009 for a range of countries and the current level of that ratio ( graph 10 ). china clearly stands out. the stock of credit outstanding in china, relative to the size of the economy, is now unusually high by emerging market standards. and this ratio is already higher than in many advanced economies. so what has happened in china is quite different to the normal pattern. http : / / www. rba. gov. au / speeches / 2018 / sp - gov - 2018 - 05 - 23. html 11 / 20 5 / 25 / 2018 australia's deepening economic relationship with china : opportunities and risks | speeches | rba graph 10 over the period of rapid credit expansion, there was a series of reforms to modernise the chinese financial system. interest rate controls have been relaxed, although there is still ‘ guidance ’. a deposit insurance system has been introduced and the regulatory system has been strengthened. the capital markets are playing a more prominent role in the financial system. the large state - owned banks are now listed on stock exchanges in china and hong kong. it is also now somewhat easier for private firms to obtain equity finance. controls on capital flows have also been relaxed somewhat over the last decade. it is worth recognising that, taken together, these are significant changes. a decade ago, many outside observers were sceptical that the chinese authorities would undertake reforms across many of these fronts. yet they have made significant progress. despite this progress, there is still much to be done before the chinese financial systems looks like financial systems we see in the advanced economies. one area where the chinese financial system is moving towards a more modern form is in households'access to mortgage finance. prior to the late 1990s, mortgages were essentially nonexistent. but in recent years, households have progressively enjoyed increased access to finance, which has helped lift the share of consumption in national income. at the

loans. on the other hand, though, the involvement of the state can make it easier to work through problems when they arise, and we have seen past examples of this in china. the state has the capacity, and the demonstrated willingness, to address financial problems when they occur. however, this has also tended to add to the moral hazard in the system. whether this willingness to extend assistance to troubled borrowers and lenders will extend into the future is therefore difficult to tell. so it is complicated. another concern is the growth of the so - called ‘ shadow banking ’ system – that is, credit extended outside the formal banking system. the growth in non - bank financing is evident in this next graph, which again shows the ratio of debt to gdp, but broken down into the type of entities that are providing the credit ( graph 12 ). the picture is pretty clear. most of the growth in debt has occurred outside the formal banking sector ; non - bank financing now accounts for 45 per cent of total debt, up from 25 per cent a decade ago. graph 12 this growth of shadow banking reflects a few factors. many entities in china, including private businesses and provincial governments, have had restricted access to credit through the large stateowned banks. as a result, they have sought finance outside the formal sector and they have been http : / / www. rba. gov. au / speeches / 2018 / sp - gov - 2018 - 05 - 23. html 14 / 20 5 / 25 / 2018 australia's deepening economic relationship with china : opportunities and risks | speeches | rba prepared to pay higher rates. on the other side of the equation, many investors have sought higher returns on their savings than those available through holding conventional deposits in the formal banking sector. over time, thousands of smaller banks and other financial institutions emerged to connect those seeking to borrow outside the formal sector with those seeking higher returns. many of these connections were very innovative and were often made through opaque structures, sometimes in off - balance sheet vehicles. hence, the term, shadow financing. it is useful to provide a couple of examples. one is so - called ‘ entrusted loans ’ ( graph 13 ). these loans effectively involve one entity ( say, a business ) lending directly to another entity ( say, another business ), rather than the loan being intermediated through a bank balance sheet. notwithstanding this, a bank would normally act as a trustee to the transaction and there can be a perceived promise by the