By Dexter Roberts, BusinessWeek

Just how big is China’s shadow banking sector? According to JPMorgan Chase (JPM) it is as large as 36 trillion yuan ($5.86 trillion). That’s equivalent to 69 percent of China’s gross domestic product and almost double what it was two years earlier. “It is the rapid growth in shadow banking (instead of its size) that could generate systemic risk,” JPMorgan’s Chief China Economist, Haibin Zhu, wrote in a May 3 economic research note.

Zhu points out that there is no clear definition of what makes up shadow banking. That means estimates for the size of China’s sector have ranged from as low as 2 trillion to 3 trillion yuan (as in a report last November by the Financial Stability Board, the body set up by the world’s top economies after the global financial crisis) to 30 trillion yuan. “There has been considerable discussion on the rapid growth of the shadow banking system in China, and as a consequence, the buildup of risks in China’s financial sector,” writes Zhu. “Nevertheless, the term ‘shadow banking’ is at best vaguely defined in China.”

For his “broad definition” of shadow banking, Zhu does a good job of breaking down its constituent parts. The largest portions come from trust companies that “invest client funds according to a pre-specified objective, purpose, amount, maturity, and interest rate,” and wealth management products, that “emerged in China as a way to bypass regulation on maximum deposit rates, and are typically short term (less than six months),” writes Zhu. Those together make up about 28 percent of gross domestic product. The remainder comes from sources that include securities firms, finance companies, pawnshops, and underground lending (“informal lending activity in which individuals lend directly to each other,” which amounts to 4.8 percent of GDP), writes Zhu.

How worried should everyone be? Well, China’s shadow banking sector doesn’t pose the same kind of risks as it does in other countries. In mature economies, “shadow banking legislation has focused on money market funds, repos, and secured lending and securitization”—or complex financial products, he points out.

Instead, China’s shadow banking sector faces default risks, with borrowers including local governments, real estate companies, and small companies putting money into questionable investments; liquidity problems, with a mismatch between repayment schedules and project returns; and legal and regulatory risks, including a lack of clarity about whether the Chinese government ultimately guarantees the borrowing.

“Most retail investors expect implicit protection from the government or banks even if the underlying project defaults,” warns Zhu. “The divergence between investors’ and banks’ expectations regarding this implicit guarantee has not been officially tested.”