The Bankwatch

Tracking the consumer evolution of financial services

Shadow banking a significant problem in China

It is assumed by many that China will automatically take over from US in time.  Well that may or not be the case.  In any event we can assume the direction being followed in China will be a rocky one. 

Here is one of those quotes, relative to banking,  that makes you look twice about China.

China realty goes BOGOF MacroBusiness

In the epicentre, Wenzhou, reports that 90% of families in Wenzhou are involved in underground banking in one way or another.

And some more detail, including analysis by Credit Suisse.

In the face of high inflation and low deposit rates in the formal banking system, large number of these families are seeking higher yields, thus their money has found its way to the shadow banking system.  As monetary tightening made credit less available in the formal banking system, businesses were forced to borrow from this underground credit system (which includes stuff like loan sharks and pawn shops).

Although the current epicentre is in Wenzhou, these activities exist everywhere in China. Last week, Dong Tao of Credit Suisse wrote in a note that the underground banking system is a time bomb, and poses a potentially serious problem to the Chinese economy:

We consider the informal lending market as the most likely short-term time bomb for the Chinese economy, possibly more abruptive and explosive than the local government debt situation. Given its underground nature, it is unclear when this time bomb may explode, but something is likely to happen over the next 12 months. Either Beijing takes pro-active and decisive measures to deal with the issue, or a mini-credit crisis is likely to emerge, in our judgment.

Written by Colin Henderson

October 10, 2011 at 13:47

Posted in Uncategorized

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