Stephen Joske, a former Australian Treasury representative in Beijing who went on to manage AustralianSuper's Asia business, thinks so. After years on the ground in China, he is convinced Mr Lowe is correct to raise alarm bells about China's shadow banking sector despite the introduction of tighter banking regulations by Beijing this year.

'You have to take upfront pain to avoid a big problem'

"It is a very simple equation where the growth target has been too high since 2015 and everything flows from that. The amount of credit they are shoving into the system to achieve the growth target is what is spooking the banking sector. Unless there are very strong and very quick signals to abandon that growth target we are simply too far down the track to get out of the danger zone. You have to take upfront pain to avoid a big problem down the track," Mr Joske told AFR Weekend.

He says the risk is not bank lending, which the central government controls, but the opaque shadow banking network that grew rapidly after the global financial crisis. "Shadow bank lending is so large it is becoming increasingly opaque so eventually it becomes so big they won't have control, a panic will occur and there will be a financial crisis," he says.

However, the RBA's concerns, highlighted in a speech by Mr Lowe this week, are not just limited to wealth management and interbank lending – two areas the reserve bank highlighted - but also a host of other areas ranging from trust loans, bank-accepted bills and alternative financing such as peer-to-peer lending, microfinance companies and even pawnshops.

An elderly couple speaking to a financial planning manager at a Shanghai branch of China Merchants Bank. The couple were asking how tighter government regulations will affect their investments. Michael Smith

Combined, they make up the country's shadow banking sector, which has been described as a "bewildering matrix" of banks extending from the five big state-owned lenders to more than 2500 cooperative and small rural entities. The RBA estimates shadow financing has grown at an annual average rate of around 40 per cent since 2009 to be around US$7 trillion by September 2017, equivalent to about 60 per cent of GDP. They are hard to regulate and interconnected, which means there is the chance of a chain reaction if something goes wrong.

No shortage of investors burnt by dodgy schemes


While there is a high degree of trust around products sold through bank, there is no shortage of investors who have been burnt from dodgy investment schemes that have thrived under the country's shadow banking regime. Many of these are private wealth management companies with flashy high-rise officers in downtown Shanghai who seduce elderly investors with glossy brochures and attractive receptionists.

Guo Yangjio, a retired researcher, lost 900,000 yuan ($186,000) from five investments he made in five peer-to-peer schemes in 2014. The downside for victims of financial crime in China is that the government stops them from protesting about cracks in the financial system. "We dare not to protest because even if we plan to go out the local police will come and stop us. I've lost all my hope in getting my money back, I think the opportunities are very slim," he told AFR Weekend.

Not everyone is convinced the system is heading for a crash landing though. Many economists inside and outside China point to President Xi Jinping's renewed focus on stabilising the country's economy, cracking down on dodgy investment schemes and introducing tighter regulation and reform of the country's banking sector.