Shadow Banking in China

Ever wonder about Shadow Banking in China? Yukon Huang, a Yale alumnus and formerly the World Bank’s China manager, has written the best book ever published on China’s economy, Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong.

He addresses analysts’ widely accepted yet misguided views of China’s economy and examines arguments about the reality, causes and effects of China’s alleged debt and property market bubbles, trade and investment relations with the Western world, the links between corruption and political liberalization in a growing economy and Beijing’s more assertive foreign policies.

The author explains that such misconceptions arose partly because China’s economic system is unique in many ways because it’s driven by both the market and state. This, along with China’s size, regional diversity, and uniquely decentralized administrative system, complicates the task of designing accurate and adaptable analysis and research and poses difficulties in making generalizations and comparisons from micro to macro levels.

Here’s a sample: “Of the three other major emerging markets, shadow banking represents a larger share of banking assets than it does in China:

China Shadow Banking

Opinions on the issue of shadow banking in China are divided. Many financial experts have noted that shadow banking is more responsive to the needs of private enterprises that have traditionally lacked access to the state-dominated banking system and that those enterprises have played a major role in driving productivity growth and employment. The People’s Bank of China estimates that half of all the firms it regularly surveys have accessed some form of shadow banking.’ Others are alarmed by the rise of shadow banking in China because it is widely perceived to be more risky than traditional bank lending, which is subject to more stringent oversight. As with the broader debt, concerns about China’s shadow-banking system often focus on its rapid growth rather than its absolute level. Shadow-banking activities in China expanded dramatically since the end of the credit-fueled stimulus in 2009, accounting for roughly a quarter of the outstanding credit stock until recently.

Much of the growth in shadow banking was driven by the surge in property related financing. In 2014, shadow bank-ing was scaled back significantly as the property market cooled off and local governments turned to bond financing to reduce their debt burdens. More re-cently, shadow banking has resurfaced in response to movements in the prop-erty market and a rise in WMPs being issued by the smaller banks as a means to secure funding to increase their loan-making capacity Regardless, rapid growth of shadow banking is not atypical of emerging mar-kets in recent years. According to the FSB, seven major emerging market coun-tries have experienced growth above 15 percent, and China’s pattern is broadly similar but more affected by property-related activities. Such growth rates should not be considered inherently problematic for countries developing their nascent shadow-banking systems from a very low base.

 

This is part of an ongoing series, Is China’s Debt Exaggerated?

Written by Godfree
Visiting China and studying it since 1967. Interested in its culture, politics, education and economy.