The growth of China’s nonbank financial institutions, which engage heavily in shadow banking , has been extraordinary over the past decade. During this period, China’s shadow banking system not only engaged in aggressive regulatory arbitrage but also started to embrace financial innovations and capital market financing against the backdrop of broad financial reforms. Its emergence and transformation are intertwined with a substantial increase in depth and complexity of China’s financial system, which post new regulatory challenges. The growing importance of shadow banking in China makes a renewed in-depth look into its scale, structure, and risks both interesting and necessary. This Asia Focus explores the drivers behind shadow banking system’s growth in China, reviews the changing pattern of shadow banking activities, analyzes associated risks in the context of China’s growing capital markets, and discusses future regulatory challenges.