The hidden dangers of China's shadow banking sector have shown fundamental improvement, as the wild growth of shadow banking in the country has been contained effectively due to a nationwide crackdown on such activities since 2017.

The broad measure of shadow banking, which is defined by the Financial Stability Board as credit intermediation involving entities and activities outside the regular banking system, fell to 84.8 trillion yuan ($13 trillion) as of the end of 2019, down from 100.4 trillion yuan at the beginning of 2017.

The narrow measure of shadow banking, which includes interbank investments through special purpose vehicles, interbank wealth management, entrusted loans, trust loans and online peer-to-peer lending, dropped by 11.87 trillion yuan from a historical peak to 39.14 trillion yuan at the end of last year, said a report issued by a research group of the China Banking and Insurance Regulatory Commission. The commission systematically defines shadow banking in China for the first time.

With the development of cross-sector, cross-market comprehensive operation of financial business, China's shadow banking sector saw a rapid rise after 2008, increasing the level of financial leverage, falsely encouraging funds to remain idle within the financial system, and concealing the real situation of banks' asset quality, said the report published on Friday on the WeChat official account of Financial Regulation Research, a Beijing-based monthly journal.

Starting in 2017, China launched a special campaign to address market irregularities, such as high financial leverage, complex structured financial products and the flow of capital from the real economy, the part of the economy that produces goods and services, to the virtual economy.

Ever since then, the shadow banking sector has steadily declined relative to the formal banking system, Moody's Investors Service said.

"Overexpansion of shadow banking will bring risks to macroeconomic regulation and financial stability," said Wen Bin, chief analyst at China Minsheng Banking Corp.

"In the past few years, regulatory measures to deleverage and remove channels — usually nonbank vehicles through which banks, companies and individuals invest customers' deposits or their own money in high-yield products to achieve higher returns — have achieved significant results. The efforts promoted the banking sector to better serve the real economy," he said.

Regulators also clamped down on illegal fundraising and online lending activities, tightened cross-sector financial supervision and implemented capital appropriation and provisioning requirements for shadow banking.

"We will keep improving the regulations and the risk monitoring system of shadow banking, persevere in dismantling high-risk shadow banking, and take precautions against a rebound in this type of business," said Liu Zhongrui, an inspector of the commission's Statistics, IT and Risk Surveillance Department, at a briefing on Sept 14.