The size of China's shadow banking sector reached 20.5 trillion yuan ($3.4 trillion) by the end of 2012, equivalent to 40 percent of the country's GDP last year, the Xinhua News Agency reported Wednesday, citing a report published by a government think tank.

The report, released Tuesday by the Chinese Academy of Social Sciences (CASS), differed from official statistics, according to which the size of the shadow banking market in China was 14.6 trillion yuan by the end of last year, equivalent to 29 percent of the country's GDP.

The shadow banking sector's share of the country's total banking assets was 16 percent by the end of 2012, according to the CASS, which is also higher than official calculation of 11 percent, the report said.

With no clear definition of the country's shadow banking system, the difference in the data is mainly due to different calculation methods, the report said, noting that official statistics only include wealth management products issued by banks and assets managed by trust firms, while the CASS calculations also include private lending, auto finance companies and small loan firms.

China's shadow banking system has deve­loped rapidly since 2010.

Its fast growth has not only provided liquidity to the country's real economy, but also promoted financial innovation and paved the way for the liberalization of interest rates, the CASS report noted.

However, the CASS also highlighted problems in the domestic shadow banking system, such as liquidity risks, which have begun to threaten the stability of the financial system, and also excessive credit expansion, which could create syste­mic risks.

A protection mechanism for investors should  be established to safeguard their interests, and there should be more information disclosure by participants in the shadow banking sector, the report noted.