China’s shadow Banking and credit boom By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

September 13, 2016 | Posted by bobbysrinivasan << back to blog

As per statistics, Chinas overall debt level has soared to about 240% of GDP. This is primarily due to a surge in lending to non-financial state owned enterprises that absorb about half of all bank lending but account for only about 20% of industrial output. These institutions have created wealth management products which offer upto 14% an unrealistic rate of return. Critics believe that many of these institutions will fail to deliver these promises and hence the NPA is likely to go up creating a threat to the financial sector stability. This is a conversation between a student and his professor.

Student: Professor, I read in the papers that the Chinese economy will grow at 6.6% this financial year and expected to grow slowly to 5.9% by 2020 with shadow banking hurting the economy.

Professor: According to James Daniel of IMF that the healthy growth of China depends upon healthy credit growth. But then there is the risk of high default. While this may affect the economic growth China’s big four banks have very limited exposure to these wealth management products. According to the data available only 15 trillion Rmb of China’s wealth management products are owned by banks that only amounts to 8% of the assets. You see China’s problem is more into the future. Global economic slowdown is underway and further slowdown is imminent. China has huge under utilised capacity besides a huge work force waiting eagerly to be employed. China has to turn its attention to the local economy. The latest data shows 22% drop in exports to the Eurozone this financial year. Being an export driven economy this is inevitable.

Student: What future course of action do you see from the Chinese government?

Professor: First they will try to boost the consumption. This may require some quantitative easing. Such action almost always lead to currency devaluation. That is the last thing the global economy wants. Using this as excuse other countries may engage in competitive devaluation establishing the supremacy of dollar. They may also withdraw money from overseas to support this activity. This could involve pulling large chunk of money out of the US treasury which may have an impact on the global interest rates. Having said all that one needs enormous courage to talk about what is likely to pan out. We just need to wait and see.

Student: OK, Professor.

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