china the engine of shadow banking

(Reuters) - The world's "shadow banking" sector grew by $5 trillion last year to $71 trillion, helped by a 42 percent expansion in China, according to the latest annual figures from the Financial Stability Board.

Shadow banking covers more lightly-regulated areas of finance that includes bank-like activities such as borrowing and lending that take place outside banks. These include the repurchase agreement market, securities lending, real estate, hedge funds, money market funds, and securitization.

Shadow banking became a pejorative term because of its role in the 2007-09 financial crisis. But the tone has changed because of the need for alternative sources of money to fund economic growth while banks focus on repairing balance sheets.

But policymakers also worry that as mainstream banks become more regulated in the wake of the crisis, some of their more risky activities could shift to the shadow banking sector.

The third annual set of data from the FSB, the regulatory task force for the Group of 20 economies (G20), provides a statistical underpinning to new global rules for shadow banks that are now being finalized.

The United States accounts for $26 trillion or 37 percent of the $71 trillion total, followed by the euro zone at $22 trillion, Britain at $9 trillion, and Japan at $4 trillion.

The sector grew by more than 20 percent in four emerging markets - China, Argentina, India and South Africa - partly a sign of how their financial systems are deepening from a small base, the FSB said.

China still only accounts for 3 percent of shadow banking despite being the world's second biggest economy.

The FSB noted a rise in non-bank sources of financing to small companies in particular, a development where potential risks needed closer monitoring.

"Our aim is for shadow banking to deliver transparent and resilient market-based financing, thus diversifying the sources of financing of our economies in a sustainable way," FSB Chairman and Bank of England Governor Mark Carney said.

"The FSB will continue to improve its global monitoring exercise to identify the financial stability risks posed by shadow banking as the result of its use of leverage, maturity and liquidity transformation."

Shadow banks account for a quarter of the world's total financial assets and equivalent to half of banking assets.

But a lack of data on risks to financial systems from links with foreign shadow banking systems creates a potentially large gap, the FSB said.

(Reporting by Huw Jones. Editing by Jane Merriman)