Authors Andrew Sheng and Ng Chow Soon reveal the enormous scale of the shadow banking sector in China in their new book, Shadow Banking in China: An Opportunity for Financial Reform, and discuss some of the key risk that should prompt a regulatory response.According to the Fung Global Institute and Morgan Stanley, total alternative financing grew from RMB6.9 trillion to RMB28.4 trillion between 2007 and 2012. Total bank loans grew from RMB27.8 trillion to RMB67.3 trillion.That is, in the five years to 2012 bank finance grew at a peak of 33 per cent 2008-2009 and 16 per cent 2011-2012. Alternative financing grew at a peak of 72 per cent 2009-2010 and 45 per cent 2011-2012. And that's just until 2012.There are large risks. The authors said that "while less leveraged and sophisticated by global standards, the sharp rise in China's shadow credit since 2007 threatens systemic stability."They identified some key risks:• Corporate leverage and opaque bundling of credit risks between shadow and formal banks;• A sharp slowdown and property price correction triggering higher non-performing loans (NPLs) and liquidity pressures in the weakest sectors; and• The "moral hazard" of state bail-outs."Unofficial" lending is particularly opaque. The Financial Times this week ran an article on some of China's largest resources corporations and shipbuilders "searching for higher returns in the unregulated lending industry as their core businesses struggle with overcapacity and an overall slowdown in economic growth in the country."According to the FT, "analysts have flagged the rapid growth of entrusted lending among large companies, mainly state-owned miners and heavy manufacturers, as a worrying trend and a potential contributor to China's bad-debt problem.""We believe that these non-financial [state-owned enterprises] do not have the expertise to operate like a bank and evaluate the creditworthiness of the lender, and it is likely that these loans would become non-performing as the economy slows further," Chua Han Teng, an analyst at Fitch's BMI Research, said in a report.This is quintessential "shadow" banking. So-called entrusted loans are loans made from one company to another, "vaguely resembling the banking industry but without the risk controls that licensed lenders exercise when making credit decisions" in the FT's words.The FT cited research showing some of China's biggest industrial companies are now entrusted lenders."The aggregate stock of entrusted loans in China hit RMB12.06 trillion in June, an increase of 20.8 per cent from the year before, making it the fastest growing segment of core shadow banking in the country," the FT says. "Entrusted lending has grown by 70 per cent since the start of 2014."So how big a risk is the shadow sector in China, both in its own right and as a source of contagion in the region?According to Sheng and Ng in their book, not huge. They argue only 20 to 40 per cent of shadow loans could contaminate the banking sector and even in a "disaster" scenario that would only push banking sector NPLs to seven per cent."Systemic crisis is unlikely as China has adequate resources and policy space to address domestic