less than rmb2 trn at the end of 2010 to over rmb7 trn at the end of 2012. with another rmb 1 1.5 trn of WMPs on issue from trust companies, diversified financial services firms not subject to bank regulation. Since late 2012 the weighted average interest rate on three-month WMPs has hovered in the range of 4-5%, or about 150-250 basis points higher than the comparable bank deposit rate. On the other side of the balance sheet, the years 201 1-20 12 saw an impressive increase in"shadow lending, which in the Chinese context refers to a wide range of credit arrangements other than normal bank loans, including loans by trust companies, discounting of commercial bills, and loans from one corporation to other(typically, from a state-owned enterprise to a private company)in which a bank or trust company acts as an intermediary Almost all of the acceleration in total credit growth from mid-2012 through April 2013 came via shadow lending", growth in traditional bank credit remained more or less static during this period Despite much excited commentary in the international financial media, the response by Chinas regulators to the rise of the shadow finance system has been relaxed. PBC governor Zhou and various other officials have generally taken the public view that most of the shadow system, on oth the WMP and the lending side, reflects a healthy response to market demands that the traditional banking sector cannot meet. Periodic efforts have been made to slow the growth of shadow lending bly since May 2013), but in the main regulators have been content to allow the shadow sector 's share of total credit to rise The best way to describe this stance is"deregulation through inaction " Formal deregulation of bank deposit rates, though considered by many analysts to be an urgent and essential reform, is proceeding sluggishly. Banks were granted very modest flexibility to adjust deposit rates above PBC-set benchmarks in June 2012; but since then no additional steps have been taken, and the government has recently backed off from pledges made at the National Peoples Congress in March 2013 to make specific additional moves on deposit-rate deregulation before the end of the year. In the absence of a clear political consensus to move ahead with formal interest-rate beralization, financial reformers appear to have embraced a strategy of growing out of the plan": instead of pushing aggressively deregulation of the regulated financial sector, they will simply allow the more weakly regulated shadow system to grow more rapidly than the regulated secto This approach is deeply unsatisfying to many purists. For one thing, the broader benefits of leposit-rate liberalization(notably the boost to household incomes from the increase on the return on financial assets) are vitiated if higher interest rates are restricted to WMPs, which usually carry a minimum deposit of Rmb50,000 or more and so are available only to the richest Nicholas Borst, "Shadow Deposits as a Source of Financial Instability: Lessons from the American Experience for China, " Peterson Institute for International Economics policy brief, May 2013 Nicholas Lardy, Sustaining China's Growth After the Global Financial Crisis, Peterson Institute for International Economics. 2012less than Rmb2 trn at the end of 2010 to over Rmb7 trn at the end of 2012, with another Rmb 1- 1.5 trn of WMPs on issue from trust companies, diversified financial services firms not subject to bank regulation. Since late 2012 the weighted average interest rate on three-month WMPs has hovered in the range of 4-5%, or about 150-250 basis points higher than the comparable bank deposit rate.5 On the other side of the balance sheet, the years 2011-2012 saw an impressive increase in “shadow lending,” which in the Chinese context refers to a wide range of credit arrangements other than normal bank loans, including loans by trust companies, discounting of commercial bills, and loans from one corporation to other (typically, from a state-owned enterprise to a private company) in which a bank or trust company acts as an intermediary. Almost all of the acceleration in total credit growth from mid-2012 through April 2013 came via “shadow lending”; growth in traditional bank credit remained more or less static during this period. Despite much excited commentary in the international financial media, the response by China’s regulators to the rise of the shadow finance system has been relaxed. PBC governor Zhou and various other officials have generally taken the public view that most of the shadow system, on both the WMP and the lending side, reflects a healthy response to market demands that the traditional banking sector cannot meet. Periodic efforts have been made to slow the growth of “shadow lending” (notably since May 2013), but in the main regulators have been content to allow the shadow sector’s share of total credit to rise. The best way to describe this stance is “deregulation through inaction.” Formal deregulation of bank deposit rates, though considered by many analysts to be an urgent and essential reform6 , is proceeding sluggishly. Banks were granted very modest flexibility to adjust deposit rates above PBC-set benchmarks in June 2012; but since then no additional steps have been taken, and the government has recently backed off from pledges made at the National People’s Congress in March 2013 to make specific additional moves on deposit-rate deregulation before the end of the year. In the absence of a clear political consensus to move ahead with formal interest-rate liberalization, financial reformers appear to have embraced a strategy of “growing out of the plan”: instead of pushing aggressively deregulation of the regulated financial sector, they will simply allow the more weakly regulated shadow system to grow more rapidly than the regulated sector. This approach is deeply unsatisfying to many purists. For one thing, the broader benefits of deposit-rate liberalization (notably the boost to household incomes from the increase on the return on financial assets) are vitiated if higher interest rates are restricted to WMPs, which usually carry a minimum deposit of Rmb50,000 or more and so are available only to the richest 5 Nicholas Borst, “Shadow Deposits as a Source of Financial Instability: Lessons from the American Experience for China,” Peterson Institute for International Economics policy brief, May 2013. 6 Nicholas Lardy, Sustaining China’s Growth After the Global Financial Crisis, Peterson Institute for International Economics, 2012