Precisely a year ago, a summary report by Fitch shone the first, if relatively weak, light on the massive Chinese securitization industry which had for years allowed the country to fund its housing bubble without forcing the banks to actually take much if any of the loan risk associated with this unprecedented expansion. At the time of the Fitch report, the securitization discrepancy was not deemed to be excessive and at about RMB 1 trillion in annual issuance it was promptly swept under the rug. Nonetheless the key statement remained: “Fitch believes the vast majority of these transactions are not publicly disclosed by Chinese banks, and few, if any, traces of the loans remain in financial statements.” More recently, and long overdue, Moody’s took a refresh look at the same problem and on July 4 released a rather disturbing report which found “that the Chinese audit agency could be understating banks’ exposures to local governments by as much as RMB 3.5 trillion.” At 10% of GDP, the number sure is starting to get larger. Today we present what we believe is the most comprehensive report we have seen to date on the matter of the Chinese “Shadow Banking” industry courtesy of SocGen. For those who enjoy putting things into perspective, SocGen quantifies the total shadow banking system in China to be as large as RMB10 trillion (or 55%, of the Total Social Financing of RBM18 trillion): nearly USD1.5 trillion. While the number is not massive (considering that the most recent corresponding shadow banking number for the US is well higher at about $16 trillion), it keeps increasing as a portion of GDP. Why is this important? Because as SocGen’s Wei Yao says, “The currently unsupervised development of the informal financing market delays the intended impact of monetary policy tightening, but adds to the risk of precipitating a liquidity crunch of the entire financial system later.”
Yao adds: “However, we don’t think the solution lies in simply banning such channels. Instead, they should be brought into daylight and better regulated, as China badly needs to deepen its financial system beyond the big commercial banks.” While we will not hold our breath on the regulation aspect, we are concerned by the implications of what shadow banking may imply for China’s attempts to slow its economy via conventional means, especially since round after round of RRR and interest rate hikes have so far proven useless at slowing inflation which at last check was well over 6%. So it this Chinese shadow banking system a potential monetary time bomb, destabilizing the PBOC’s efforts at normalization and adding materially to systemic risk? Read on.
From SocGen’s Wei Yao:
China’s shadow banking system awaits sunlight
China’s formal bank lending has been under restraint since the People’s Bank of China stepped up quantitative tightening late last year. However, unregulated financing activity is sprouting up like weeds throughout China. Trillions of yuan in capital have been raised through investment trusts, underground money markets and high-yield retail investment products to sustain short-term liquidity for those who are cut off from the formal credit market, especially small- and medium- enterprises, private property developers, and more recently, local government financing vehicles.
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Exposing China’s Mysterious Multi-Trillion Shadow Banking System | zero hedge.
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