China’s shadow banking could lead to losses of $375 billion, according to CLSA estimates of likely levels of bad debt. The brokerage estimated the potential bad debt ratio for “bank-related shadow financing” at 16.4%, or 4.2 trillion yuan, Bloomberg reports. Assuming a 40% recovery rate left a potential loss of 2.5 trillion yuan. “Shadow financing is banking reform gone wrong given that the key driver of growth has been the banks circumventing regulations to protect their margins,” analyst Francis Cheung wrote in the report. “Shadow financing has grown rapidly, benefiting from implicit government guarantees despite being a channel for credit to higher-risk industries.” In May CLSA estimated that bad debt on banks’ regular loan books could be nine times higher than official numbers, with potential losses of $1 trillion.