Economy

Google Ad

The World Bank warn the steep growth of shadow banking could trigger a debt crisis in China in it's October report on the East Asian and Pacific economies. Chinese debt levels and it's "shadow banking" they see as one of the greatest threats to regional prosperity.

The world bank said shadow banking activities were “creating additional vulnerabilities in the financial sector,”

China Shadow BankingWhat is Shadow Banking?

Broadly defined as credit intermediation involving entities and activities outside the regular banking system, shadow banking raises important policy concerns. Given significant challenges with data availability, the size, nature and significance of shadow banking in emerging market and developing economies (EMDEs) are even less discussed and understood.

Shadow banking in EMDEs generally does not involve long, complex, opaque chains of intermediation, as is often the case in advanced economies. Nonetheless, it can pose systemic risks, both directly, as its importance in the total financial system grows (with the concomitant credit, market, and liquidity risks that its participants undertake), and indirectly through its interconnectedness with the regulated banking system. - Chasing the Shadows : How Significant is Shadow Banking in Emerging Markets?

Most representative shadow banking activities in China:

  1. Entrusted loans
  2. Trust loans 
  3. Bankers’ acceptances

These activities "soared from under 7pc of GDP in 2005 to over 31pc of GDP in 2016," the World Bank warned.

The scary nature of shadow banking is you don't know what is real, what is duplicated and what may be worthless and as such the risk it poses is systemic. Freya Beamish, chief Asia economist at Pantheon Macroeconomics said “It’s very difficult to separate out the shadow entities, they are so intimately related to the conventional banking system I’m almost loathe to call [them] entities. They are activities [within the system].” 

Bad debt could be as much as 20-30pc of GDP in China, warned Ms Beamish. She said that a liquidity squeeze from rising global interest rates would help reveal the scale of China’s shadow banking and bad debt.

“There’s the old adage that if the tide goes out you see who’s swimming naked. Well, in China the point is if the liquidity dries up these companies won’t be able to roll over bad debts and get new loans to pay the interest on old ones.

The Daily Telegraph reported that authorities have visibly cracked down on activities in the insurance sector in the past year, reportedly detaining the head of major insurer Anbang, Wu Xiaohui. The former head of the insurance regulatory commission Xiang Junbo has also been placed under investigation for suspected “serious disciplinary violations,” according to the Central Commission for Discipline Inspection. That is a scary backdrop with that level of deceit. 

“Companies such as Angbang, have been buying long-term real assets outside of China, using shorter term liabilities inside China. Authorities have realised there’s a currency and an asset liability maturity mismatch,” said Ms Beamish.

Cleaning up China’s financial industry is a matter of controlling international political relationships as well as an effort to become attractive for foreign investment, Ms Beamish added.

Source: World Bank, Daily Telegraph 

Log in to comment
Discuss this article in the forums (8 replies).