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With a weaker Chinese economy, and a debt burden expected to rise by three to four percentage points of GDP shadow banking practices should be a concern; However both rating agency Fitch and Morgan Stanley downplay the risk believing the debt is now more transparent.

China Bnaking System BIS

The BIS mapping of the Shadow Banking System - Have the Risks Really Diminished?

Morgan Stanley's Chief China Economist Robin Xing told CNBC on Friday that China has been trying to reduce its reliance on debt, but the trade war is a roadblock in these efforts.  Interestingly Morgan Stanley, says the Chinese powers that be are expected to better manage the risks of people borrowing from non-official channels, that is shadow banking this go around. Even though by its measures  China's debt in relation to its economy is expected to climb by three to four percentage points of its economy,

Back on Feburary 12 Fitch issued a report on China and shadow banking which appears to have fed Xing's thinking;

  • FITCH RATINGS: CHINA'S SHADOW BANKING SECTOR TO SHRINK FURTHER IN 2019
  • FITCH SAYS CHINA'S SHADOW FINANCING IS LIKELY TO DECLINE FOR A SECOND YEAR CONSECUTIVE YEAR IN 2019
  • FITCH SAYS CHINA'S SHADOW BANKING ASSETS SHRANK TO JUST BELOW 60% OF NOMINAL GDP IN 2018, EXPECT FURTHER DROP TO AROUND 50% OF GDP THIS YEAR 
  • FITCH SAYS IN CHINA, FUNDING CONDITIONS ARE LIKELY TO STAY RELATIVELY TIGHT, PARTICULARLY FOR PRIVATE-SECTOR ENTERPRISES
  • FITCH- LEVERAGE OUTSIDE BANKS RISING AT NOTICEABLY SLOWER PACE, CONTAGION RISKS BETWEEN BANKS & NBFIS FALLING WITH DROP IN SHADOW BANKING ACTIVITY IN CHINA
  • FITCH SAYS CHINA'S OFFSHORE FUNDING MARKET ALSO REMAINS CHALLENGING
  • FITCH SAYS CHINA'S ISSUANCE COSTS COULD RISE FURTHER IF FEDERAL RESERVE RESUMES MONETARY TIGHTENING LATER IN YEAR

Source text for Eikon: Feb 12

What I take from this is shadow banking is still rising but a slower pace, as you would expext with a slowing economy. Secondly who really know's what he true numbers are?

Of course this time it's different

Morgan Stanley's Chief China Economist Robin Xing told CNBC on Friday, referring to the debt-to-GDP ratio. "This time, it's a bit different because they are using more manageable, or transparent leverage rather than re-opening shadow banking," Xing told CNBC, saying that the Chinese government is increasing the quota of local special bonds, which are essentially backed by the state.

Shadow banking as they name suggests, refers to banking in the shadows, activities performed outside the formal banking sector, and therefore subject to lower levels of regulatory oversight and higher risks. These funding vehicles are offered as Wealth Management Products or WMPs.

China Shadow Banking. Stock of Total Social Financing

Characteristics of Chinese Shadow Banking

The BIS identify five key characteristics of shadow banking in China.

  • The first distinct feature is the dominant role of commercial banks. For this reason, it is often dubbed the “shadow of the banks”. Securitisation and market-based instruments play only a limited role.
  • Second, shadow banking serves important economic functions, especially in the form of providing alternative savings instruments and intermediating credit to private firms with less privileged access to formal bank credit.
  • Third, shadow credit intermediation generates tight linkages within the financial system, including the bond market.
  • Fourth, it is far less complex than its US counterpart.
  • Fifth, perceived and actual guarantees are pervasive. Although pervasive guarantees are not at all unique to shadow banking in China, the form and nature of such guarantees are.

China Shadow Banking

State-owned banks usually prefer lending to companies owned by the government, which are considered safer borrowers than private firms. Private companies access shadow banking, contributing to China's overall debt levels.

"Despite the temporary increase in the debt-to-GDP ratio, it's much more manageable and transparent than 2013 to 2017 when shadow banking was surging," Xing concluded.

Given China being a state run, or communist run economy that a major part of the funding for WMPs comes from individual investors who are effectively left outside the norm,  Since 2015 the share of interbank WMPs has risen rapidly which signals a shift in the use of WMPs from providing an alternative savings instrument to savers towards supporting the more complex forms of ”structured” shadow credit intermediation the BIS concluded.

By the end of 2016, about 53% of WMP funds were obtained from retail investors and wealthy individuals through private banking. Today economists say the country has more or less paused its deleveraging efforts and instead, is putting in place more easing measures in a bid to prop up its economy. "The January credit data indicates that the easier monetary and financial stance has started to result in more lending to the real economy," Oxford Economics Head Asia Economics Louis Kuijs said in a note this week. But this doesnt help those private compnaies seeking loans. Hence their reliance on shadow banking.

"By second quarter of this year, we think that real economic activity will start to improve, given that easing (will) start to work." -Robin Xing, Chief China Economist at Morgan Stanley

Banks extended a record 3.57 trillion yuan ($530 billion) in new loans in January, which reflected "pressure from the authorities to raise lending to the corporate sector, especially the private sector," Kujis said.

Morgan Stanley's Xing said. "The economy is still quite weak in first quarter ... however we're seeing intensified easing efforts from the policy makers," he said. "By second quarter of this year, we think that real economic activity will start to improve, given that easing (will) start to work."

So does any of the latest Chinese economic numbers or for that matter, their biggest customers sugegst any of this is getting better?  Another thought with the large percentage offered as WMP's, how many are no of less or little value and used as collateral elsewhere?

Source: CNBC BIS Mapping shadow banking in ChinaBIS Mapping shadow banking in China

From The Traders Community Research Desk

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