inside chinas shadow banking the next subprime crisis

This will risk an economic recession, but it may be what is needed to avoid the next global financial crisis. In the past two. and to further prevent a possible credit crunch in the future? • Will shadow banking destabilize China's financial system and cause a new financial crisis? At the end of 2009, the PBC began to tighten the M2 supply for fear of an overblown bank credit expansion after the 2008 financial crisis. As M2 growth. inside chinas shadow banking the next subprime crisis

EMILY LIN chronicles the explosive growth and harrowing decline of shadow banking in China.

Lufax is one of mainland China’s largest online wealth management platforms. Photo: Reuters

China’s shadow banking sector has developed rapidly since the Global Financial Crisis in 2008, sparking intense international debate over the potential financial risks that may arise in a largely unregulated private lending market. The scale of China’s shadow banking sector is estimated to encompass roughly 43% of China’s total GDP at RMB 25 trillion, growing over time to accommodate the credit demands of China’s private sector, which has encountered unequal access to credit when borrowing from traditional state-owned banks. Although shadow banking is a relatively recent phenomenon, the practice of private lending in China extends back to the era of reform and opening up in the 1980s, reflecting a larger credit constraint problem that is biased towards state-owned enterprises (SOEs) and large firms. Understanding the rise and fall of shadow banking in the last decade will give insight into a major policy initiative of the current Chinese administration to reform its financial and banking institutions in order to promote indigenous innovation and sustainable macroeconomic growth.

– ∞ –

Informal lending networks have existed for decades as a way to borrow interest-free money from relatives and friends. In the past, informal lending between relatives and rotating credit associations were small in scale, mostly confined to a single town, and used to finance costly life events such as weddings. These small scale networks expanded into larger rotating credit associations, trade credit, pawnshops, rural cooperatives, and other informal lending institutions in the 1980s due to the political and institutional constraints on private sector growth. While Deng Xiaoping prioritized economic growth over ideology, the central state still maintained a heavy hand in deciding where credit was allocated. The central bank implicitly guaranteed all loans, maintaining artificially low interest rates to ensure credit was accessible for highly inefficient and costly SOEs. Banks lacked a framework for evaluating credit risk, distributing resources based on central lending policies rather than profitability.

As China transitioned from having little to no banking institutions to developing a more modern and robust financial sector, credit constraints still permeated the banking sector. Private capital was not allowed to provide credit to borrowers without explicit permission from the state. Due to the continued monopolization of the banking sector, informal lending institutions evolved into a massive shadow banking sector. The shadow banking sector connected China’s numerous private savers, who sought higher returns, with small and medium enterprises (SMEs), which needed capital.

These private lending networks were often more formalized and sophisticated in the southern coastal regions, particularly in Wenzhou and Fujian, since local government officials were sympathetic to the growing private sector as a crucial source of tax revenue. In contrast, the inland regions were dominated by heavy industries established prior to China’s reform and opening up, directing the flow of credit to state-subsidized firms in steel, petroleum, railway, and telecommunications industries that were often less efficient and profitable compared to private enterprises.

– ∞ –

By the early 2000s, policy reforms focusing on marketization and private sector growth began to encourage indigenous innovation over manufacturing industries, but credit allocation for SMEs continued to be disproportionate to usaa bank colorado springs phone number contributions to China’s overall GDP. According to a paper by Justin Yifu Lin, an economist and former VP of the World Bank, SMEs accounted for 60% of GDP growth and 80% of employment, but less than 1% had access to bank loans. In addition, an ethnographic study done by Professor Kellee S. Tsai on the workings of informal credit institutions revealed that most individuals looking to start a small business didn’t even bother with the cumbersome and time-consuming application loan process in traditional banks and would immediately turn to shadow banking institutions that provided credit faster but at a higher cost.

The next stage of shadow banking growth came after the Global Financial Crisis of 2008. China’s economic growth slowed to an all time low of 6%, prompting the central government to pump out a stimulus package of RMB 4 trillion that indirectly fueled an expansion of the shadow banking sector. Most of this credit was allocated toward promoting infrastructure and real estate development and continued to be inaccessible to SMEs and individual households. However, the rapid expansion of monetary policy created large asset bubbles and entangled the shadow banking world with the traditional banking sector when state-controlled banks began selling wealth management products (WMPs) to investors and ordinary households. These financial assets were often uninsured but were treated as bank deposits with lenders promising inside chinas shadow banking the next subprime crisis returns of inside chinas shadow banking the next subprime crisis without disclosing much information about the quality of investments.

The government’s subsequent decision to tighten monetary policy precipitated the collapse of various Ponzi schemes, which were intricate pyramid hierarchies that lured investors in with promises of high returns but actually paid them using funds from new investors and not returns on sound investments. As a result, the shadow banking world experienced a series of crises in 2011 that occurred after a small section of the lending pyramid defaulted, creating massive losses freedom mortgage payment schedule investors and ordinary households that had invested much of their lifetime savings. These severe defaults began in Wenzhou with disputes totaling roughly RMB 5 billion, placing intense pressure on China’s judicial system after private lending cases in courts increased by over 71% in one year. Later on, the collapse of other private lending schemes spread to Fujian, Guangdong, Sichuan, Henan, and other provinces, prompting the government to impose stricter regulations and prevent future systemic risk.

– ∞ –

In the past, China’s central government did not make serious efforts to crack down on the shadow banking sector since it was profitable for all parties involved, connecting potential investors with high savings one america news roku SMEs that needed the credit to finance their enterprises. On a macroeconomic level, shadow banking also helped to spur China’s realtor com wyoming economic growth since it was responsible for providing credit to a growing body of domestic enterprises, promoting China’s goal of transitioning from an export-based economy to one driven by indigenous innovation and domestic consumption. However, the 2011 crisis revealed the urgency of the problem, prompting Xi Jinping and his administration to take concrete steps to stabilize China’s financial sectors.

In addition to deleveraging initiatives that targeted debts held by large, inefficient SOEs, the central government also increased regulations on WMPs that impacted roughly US$2 trillion worth of investments. By 2017, the new regulations included WMPs as part of required health checks for banks and established clear universal guidelines for lending policies. These initiatives were successful in drastically slowly WMP growth in 2018, helping to curb some of the imbalances in the shadow banking sector.

Future policy initiatives, however, will have to strike a delicate balancing act between protecting long-term financial stability through increased state regulation and expanding market-based allocation of credit through reduced state control. Additionally, creative polices are needed to regulate the increasingly popular P2P networks that have boomed with the rise of Internet finance platforms such as WeChat Pay and Alipay. These P2P networks overcome information asymmetry by acting as intermediaries between creditors and lenders, using big data to determine a borrower’s creditworthiness much faster than the traditional banking sector can. However, the fact that these networks can cross geographical boundaries and do not require physical locations may make them more difficult to regulate, creating a challenge for the central government that will have great implications in influencing China’s future growth trajectory. Recently, regulators in Shanghai ordered more than 40 P2P lenders to wind down their operations and exit the business, suggesting the Chinese government has no desire to court a repeat disaster.

Additional Resources

Geertz, Clifford. “The Rotating Credit Association: A “Middle Rung” in Development.” Economic Development and Cultural Change 10, no. 3 (1962): 241-63. doi:10.1086/449960.

Lu, Lerong. Private Lending in China: Practice, Law, and Regulation of Shadow Banking and Alternative Finance. Routledge, 2019.

Oi, Jean Chun., and Andrew G. Walder. Property Rights and Economic Reform in China. Stanford University Press, 2000.

Seo, Seok-Heung, and Jang-Hwan Min. “Private Lending Crisis in Wenzhou and Financial Reform.” Chinese Studies 52 (2015): 233-52. doi:10.14378/kacs.2015.52.52.15.

Tsai, Kellee S. Back-Alley Banking Private Entrepreneurs in China. Cornell University Press, 2018.

 

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Источник: https://chinahandsmagazine.org/2019/11/01/invisible-money-rise-and-fall-of-shadow-banking-in-china/

Inside China's Shadow Banking: The Next Subprime Crisis?

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Is shadow banking in China likely to become the source of the next global financial crisis or simply a little understood area of the enormous Mainland economy? Financial industry expert Joe Zhang pulls back the curtain on this sector and explains how shadow banking in China impacts the regional and world economies. Within shadow banking, China s microcredit industry is an area of tremendous interest for most business analysts. In Inside China s Shadow Banking: The Next Subprime Crisis?, Joe Zhang pinpoints the areas of concern based on his experience in the field and his knowledge of the complicated rules and regulations of banking in China gathered during his years as an official of the central People s Bank of China in Beijing. Drawing on his time spent at UBS, as well as the work of prominent economists, Joe Zhang explains shadow banking and microcredit in China for investors, economists, laypeople, and the general public."

Источник: https://books.google.com/books/about/Inside_China_s_Shadow_Banking.html?id=6CKnnAEACAAJ

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Shadow Banking System

What is the Shadow Banking System?

A shadow banking system is the group of financial intermediaries facilitating the creation of credit across the global financial system but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions. Examples of intermediaries not subject to regulation include hedge funds, unlisted derivatives, and other unlisted instruments, while examples of unregulated activities by regulated institutions include credit default swaps.

Key Takeaways

  • The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
  • It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
  • The shadow banking system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight even since then.

Shadow Banking System

Understanding Shadow Banking Systems

The shadow banking system credit card generator with cvv and expiration date with money escaped regulation primarily because unlike traditional banks and credit unions, these institutions do not accept traditional deposits. Shadow banking institutions arose as innovators in financial markets who were able to finance lending for real estate and other purposes but who did not face the normal regulatory oversight and rules regarding capital reserves and liquidity that are required of traditional lenders in order to help prevent bank failures, runs on banks, and financial crises.

As a result, many of the institutions and instruments have been able to pursue higher market, credit, and liquidity risks in their lending and do not have capital requirements commensurate with those risks. Many shadow banking institutions were heavily involved in lending related to the boom in subprime mortgage lending and loan securitization in the early 2000’s. Subsequent to the subprime meltdown in 2008, the activities of the shadow banking system came under increasing scrutiny due to their role in the over-extension of credit and systemic risk in the financial system and the resulting financial crisis.

The Breadth of the Shadow Banking System

Shadow banking is a blanket term to describe financial activities that take place among non-bank financial institutions outside the scope of federal regulators. These include investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds and payday lenders, all of which are a significant and growing source of credit in the economy.

Despite the higher level of scrutiny of shadow banking institutions in the wake of the financial crisis, the sector has grown significantly. In May 2017, the Switzerland-based Financial Stability Board inside chinas shadow banking the next subprime crisis a report detailing the extent of global non-bank financing. Among the findings, the board found that non-bank financial assets had risen to $92 trillion in 2015 from $89 trillion in 2014. A more narrow measure in the report, used to indicate shadow banking activity that may give rise to financial stability risks, grew to $34 trillion in 2015, up 3.2% from the prior year and excluding data from China. Most of the activity centers around the creation of collateralized loans and repurchase agreements used for short-term lending between non-bank institutions and broker-dealers. Non-bank lenders, such as Quicken Loans, account for an increasing share of mortgages in the United States. One of the fastest-growing segments of the shadow banking industry is peer-to-peer (P2P) lending, with popular lenders such as LendingClub.com and Prosper.com. P2P lenders initiated more than $1.7 billion in loans in 2015.

Who Is Watching the Shadow Banks?

The shadow banking industry plays a critical role in meeting rising credit demand in the United States. Although it's been argued that shadow banking's disintermediation can increase economic efficiency, its operation outside of traditional banking regulations raises concerns over the systemic risk it may pose to the financial system. The reforms enacted through the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act focused primarily on the banking industry, leaving the shadow banking sector largely intact. While the Act imposed greater liability on financial companies selling exotic financial products, most of the non-banking activities are still unregulated. The Federal Reserve Board has proposed that non-banks, such as broker-dealers, operate under similar margin requirements as banks. Meanwhile, outside of the United States, China inside chinas shadow banking the next subprime crisis issuing directives in 2017 directly targeting risky financial practices such as excessive borrowing and speculation in equities.

Источник: https://www.investopedia.com/terms/s/shadow-banking-system.asp

Chinese Shadow Banking: Crisis or Correction?

© leungchopan, Fotolia

© leungchopan, Fotolia

CFA Society Chicago recently worked with the Chinese Finance Association and The Paulson Quick online courses to explore the risks and rewards of the Chinese shadow banking system. On behalf of CFA Chicago’s Education Advisory Committee, Peter Cook, CFA, welcomed the audience to The Conference Center in UBS Tower for this exceptional opportunity to hear straight talk from three leading experts on China’s economy—while asking if Chinese shadow banking is “a valuable new source of funding, a replay of US subprime lending or somewhere in between?”

The discussion was moderated by Evan Feigenbaum, Vice Chairman, The Paulson Institute, who holds a PhD in Chinese politics from Stanford University and has served at the US State Department as Deputy Assistant Secretary of State for South Asia and as an adviser on China to Deputy Secretary of State Robert B. Zoellick. Feigenbaum orchestrated the dialogue between Patrick Chovanec, Managing Director and Chief Strategist, Silvercrest Asset Management which manages $16.6 billion on behalf of wealth families and selected institutions and Andy Rothman, Investment Strategist, Matthews International Capital Management, LLC which has $27.9 billion in assets under management with a focus on investments in Asia.

Before joining Silvercrest, Chovanec was an Associate Professor of Practice at Tsinghua University’s School of Economics and Management in Beijing, where he also served as Chairman of the Public Policy Development Committee for the American Chamber of Commerce in China, and advised numerous governments, investment funds, and Fortune 500 corporations on the Chinese economy. Rothman spent 14 years as CLSA’s China macroeconomic strategist where he conducted analysis into China and delivered his insights to their clients and spent 17 years in the U.S. Foreign Service, with a diplomatic career focused on China, including as head of the macroeconomics and domestic policy office of the U.S. embassy in Beijing. You can also follow “Sinology by Andy Rothman” at Matthews Asia.

What is shadow banking?

Shadow banking sounds menacing and even experts disagree on a common definition. Yet, shadow banking is generally understood to include a wide set of “non-bank financial intermediaries.” These alternative financiers include asset managers, money market funds, real estate investment trusts, and leasing companies that provide non-bank lending to a variety of customers. Jamie Dimon, CEO JPMorgan Chase, described where are bank of america call centers located banking in his 2013 Letter to Shareholders as follows:

We really should not call them “shadow” banks – they do not operate in shadows. They are non-bank financial competitors, and there is a wide set of them. They range from money market funds and asset managers, mortgage real estate investment trusts and mortgage servicers, and middle market lending funds to PayPal and clearinghouses. Many of these institutions are smart and sophisticated and will benefit as banks move out of certain products and services. Non-bank financial competitors will look at every product we price, and if they can do it cheaper with their set of capital providers, they will. There is nothing inherently wrong with this – it is a natural state of affairs and, in some cases, may benefit the clients who get the better price (p. 18).

As a primer on shadow banking, I’d recommend the 14-page special report on international banking entitled “The lure of shadow banking” in the May 10th-16th edition of The Economist which provides a thorough discussion of the key terms, players, instruments and macroeconomic issues. The report explains that “shadow banking” was originally coined by PIMCO’s Paul McCulley in 2007 to describe the legal structures used by Western banks to keep complicated securitized loans off their balance sheets. As we painfully learned during the financial crisis, many of these securitized loans went bad and had to be bailed out by the banks—and then the banks needed to be bailed out by taxpayers. Today, many regulators inside chinas shadow banking the next subprime crisis shadow banking as a positive way to shift risk away from banks to other entities that are willing to assume that risk.

Some of the major “private-debt” market players cited in The Economist report include Apollo Global Management, BlackRock, the world’s biggest asset manager with $4 trillion under management, Blackstone, The Carlyle Group, Cordiant, KKR,M&G -Prudential plc and Oaktree Capital. See also Private Debt Investor Magazine. Furthermore, bond markets continue to grow as the largest source of non-bank financing. Peer-to-peer (P2P) lenders like The Lending Club are finding their own niche. And Alibaba, the Chinese e-commerce giant, launched a new money-market fund last June which raised 500 billon yuan ($81 billion) in its first nine months.

Chinese Shadow Banking Instruments

Turning to China, Chovanec explained that four years ago Chinese shadow banking was referred to as “informal lending.” And he pointed out that shadow banking isn’t necessarily from an entity that’s separate from the formal banking system in China. As Rothman noted, “every bank in China is a ‘fake’ bank because they are all controlled by the communist party.” To the extent that the Chinese government bails out its shadow banking system then risk is not properly priced and moral hazard continues to exist. With inside chinas shadow banking the next subprime crisis in mind, instruments of concern within the Chinese shadow banking system include trusts, entrusted loans and trust beneficiary rights products (TBRs). (See “Shadow banking in China: Battling the darkness” The Economist, 10 May 2014 “Every time regulators curb one form of non-bank lending, another begins to grow” Web. 10 May 2014.)

Trusts: Risky investments promising returns of 10% – chase order checks mobile app with no guarantee of a return on investment or even the return of principal. Often sold through banks, like the China Construction Bank, with an air of respectability, however, investors may generally still believe that the government will step in and protect them in the event of a default. Trusts have fueled the expansion of credit and swelled from 3 trillion yuan at the end of 2010 to almost 11 trillion yuan at the end of 2013. Over $400 billion of trust products are due to mature this year which are primarily secured by property. See the discussion of Jilin Trust, a Chinese shadow bank, which sold securities to Chinese investors backed only by loans to Liansheng Group which owns the struggling Zhuang Shang coal mine in Liulin and is now restructuring 30 billion yuan of debt in “China: A question of trust. Or not, as the case may be.” The Economist, 10 May 2014 p. 13.

Entrusted Loans: Cash rich companies, often state-owned enterprises (SOEs) lend directly to less well-connected firms. These loans often use banks as intermediaries to get around regulations forbidding such lending.

Trust Beneficiary Rights Products (TBRs): Chinese banks set up firms to buy loans from a trust and then sell rights to the income stream from the loans to a bank. Riskier corporate loans look like safer lending between banks and provide a way around the restrictions between banks and trusts. TBRs may be sold to other banks.

The Unstoppable China Growth Story: Evan Feigenbaum

Feigenbaum set the stage by emphasizing, “for all of its successes the unstoppable China story must be more balanced.” He observed that China’s own leaders have recognized imbalances, distortions and structural weaknesses in the economy. Feigenbaum says, “the popular story of China moving from growth to growth to more growth must be moderated.” Chovenec agreed and noted, “lots of legitimate economists question the GDP numbers in China.” There are a lot of truths in the China growth narrative but Feigenbaum points out, “it’s being driven by a state capitalist juggernot.” To that end, Feigenbaum warned, “in China, the politics of reform is an execution challenge of monumental proportions.” He then directed the conversation to Andy Rothman who provided the more optimistic view of China’s economy and shadow banking system followed by Patrick Chovanec who shared a more cautious view.

I would add, as shown below, that China is the second largest economy in the world and its GDP has grown from about $2.5 trillion inside chinas shadow banking the next subprime crisis per year in 2005 to $9.2 trillion in 2013 at a compound annual growth rate of nearly 17.7% over the eight-year period.

Andy Rothman: “The Bull”

Rothman quickly pointed out that China has become a very competitive entrepreneurial economy over a very short period of time. In fact, the rise of private sector employment vis-à-vis state-controlled employment is China’s most important trend and now represents 80% of urban employment. Although China’s GDP growth must inevitably slow, Rothman says remember the “base effect” which means that slower growth on a larger economic base is still a very good thing. And China is already the world’s best consumption story with 9.1% YoY real annual consumption growth between 2009 and 2013. However, consumption was a small portion of GDP due to investment growing even faster than consumption. And Andy noted that investment growth has been slowing, from an average of about 25% for the nine years through 2011 to about 16% this year. He points out that China has more than 150 cities with a population of 1 million or more and the United States has only 9 cities of that size.

Property Market

In regards to the widely publicized stories about Chinese “ghost cities” (See Leslie Stahl’s CBS 60 Minutes report on China’s Real Estate Bubble) where properties are built but lack occupancy, Rothman says it’s greatly exaggerated; there are some failed projects, but the number is not large enough to signal a systemic problem. He also pointed out there is a different business model in China; properties are pre-sold one to two years before completion and then occupancy lags 3 to 5 years as additional infrastructure is completed. And he observes that 90% of new home buyers are owner-occupiers rather than speculators as shown below:

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Shadow Banking Scale and Scope

Rothman explained that trust lending was essentially shut down by regulators during the first three quarters of 2014. Since The China Banking Regulatory Commission(CBRC) regulates both banks and trusts many feel the government has the necessary oversight to control trusts. Rothman clarified that there are only 69 trust companies operating in China and they are highly regulated, not allowed leverage and have loan-to-value ratios of 30% at most. Given the scope of the sector, he does not predict a major financial crisis in the trust sector. Some trust products will continue to fail, but given their relatively small size, as well as the absence of leverage and secondary securitization, a systemic crisis similar to that in the US is very unlikely. As shown below, shadow banking in China is just below 20% of broad money liabilities and most “shadow” institutions are Party-controlled, whereas it represents about 60% in the Eurozone and about 100% in the US.

Finally, Rothman notes that the toxic collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs), asset-backed securities (ABS) and mortgage-backed securities (MBS), at the heart of the 2008 financial crisis don’t exist in China so he doesn’t predict another “Lehman Moment.”

Patrick Chovanec: “The Bear”

Patrick Chovanec spent more than a decade living and working in private equity in China. He has been a “China bull” but now reports that most of his hedge fund friends are very bearish on China. Chovanec’s concern is that, in the wake of the 2008 financial crisis, China did not adapt but rather continued to engineer a credit and investment boom.

Chovanec asserts that China’s export-led growth model isn’t really about net exports driving growth as much as it is about “turbocharging” investments. The model works like this: poorer countries use their poverty and low wages to tap into gross exports and, given the low domestic consumer buying power, they can then justify more investment in the economy. Significant Chinese imports of machinery and raw materials are then used to meet external demand. It’s the same model used in Japan, Southeast Asia and Taiwan. However, Chovanec points out that if you produce more than you consume someone else must consume more than they produce. So the model can reach its limits as we’ve seen with China’s recent decline in GDP growth as US and European demand has declined. Chovanec feels it’s very problematic for China to continue fueling investment with credit when it can’t tap external demand.

Market Reform, or not?

At first, Chovanec believed that Chinese shadow banking was a positive story that would address issues the formal banking system could not. In theory, since private investors could lose money, there would be more accountability. Therefore, risk should be priced properly and the cost of capital would appropriately reflect those risks.

Yet, Chovanec says, “the PBOC thinks this is market reform and a backdoor method of creating a bond market to move away from bank-centric loans. However, it’s taking place in the context of moral hazard.” Chovanec goes on to say, “issuing lots of bonds does not a bond market make.” Chovanec explains that risk must be priced properly to make a bond market function well. And if the only question people ask is whether or not their investments will be bailed out then they are asking the wrong question. He says, “very few people care about the underlying asset. Instead, they are just investing and expecting those investments to be guaranteed by the state balance sheet—and that creates moral hazard.”

Chovanec is also concerned about the issuance of the corporate bonds, which are held to maturity by the banks, as local government financing vehicles. He points out that they are just like a bank loan without the capital requirements and deposit support behind them. Since interest rates are too low to attract deposits to make loans the trust sector originates the loans, and collects a fee, but is no longer responsible for credit. Chovanec’s concern is that these losses are not allowed to flow through the system and that people need to lose money for the system to function properly.

Property Markets

In the property market, Chovanec questions Rothman’s data that 90% of new home buyers are owner-occupiers. Chovanec believes the figures are too high and says, “selling agents report the data.” He believes real estate is widely used as a speculative investment because the Chinese don’t have alternative investment options. Ultimately, Chovanec says there are “hot zones and dead zones” in the real estate market and many people are speculating on the next “central business district” (CBD). He believes the market-clearing price to move into many of these properties is well below what a lot of people have paid in and they are not profitable inside chinas shadow banking the next subprime crisis developers.

A Correction Without a Correction

Chovanec thinks the China Banking Regulatory Commission (CBRC) knows the right thing to do but says, “they want a correction without a correction.” Chovanec notes, “the CBRC said they were going to crack down on pooling but pooling has never ended.” Pooling is the practice of paying out on existing investments using money coming in from new investments—essentially a Ponzi scheme. Chovanec maintains that China’s banks have to pool or else default so the CBRC continues to allow pooling. On the bright side, he feels China’s recent Third Plenum, which called for 60 market reforms, is directionally correct.

Fundamentally, Rothman and Chovanec disagree about the level of bad debt in the Chinese economy. Chovanec says inside chinas shadow banking the next subprime crisis is mounting bad debt that is repackaged, reissued and recycled—causing dead weight. And he feels Rothman underestimates the extent to which the banks are playing with their balance sheets. He points out that cash obligations are not properly reflected on balance sheets and we can only guess at them. In fact, there has not been enough liquidity to meet those needs. And Chovanec points to June and December of 2013 when the interbanking system nearly broke down. He observes leakage to off-balance sheet “stuff” such as interbank loans that are renamed as something else – then brushed under the rug. Chovanec feels all of the banks need to be recapitalized and that the losses can be socialized.

Chovanec doesn’t think there will be a “Lehman moment” in China because “they are all backed by a state-owned bank.” Instead, Chovanec thinks the steady stream of defaults will lead to the creation of a “zombie bank” like The Long-term Credit Bank of Japan (LTCB). Chovanec explained that LTCB sat on bad debt and was an immense drag on Japan’s economic growth. And he quipped, “a loan isn’t bad if you don’t insist on repayment.”

Chovanec maintains that the qualitative story on Chinese shadow banking is even more important than the quantitative story. He reminds us that many people thought the size of the US subprime sector was not too bad but they missed all of the interconnections to other parts of the financial system that were so important. Chovanec explains that nearly all Chinese lending was from banks four years ago and now even businesses and wealthy individuals are making loans and extending credit.

In conclusion, Chovanec believes, “a the farmers bank mobile app and disruptive adjustment needs to take place to put them [China] on the right path.” He feels an economic adjustment would be a positive thing for China and that it can afford to consume more than it produces. Chovanec wishes that this adjustment had begun in 2010 but instead believes the explosion of financial instruments we’ve seen in China will be problematic.

Источник: https://www.cfachicago.org/blog/chinese-shadow-banking-crisis-or-correction/

Less creditworthy borrowers in China who used to lean on nonbank lending are set to remain under funding pressure in the medium term, analysts say, as the nation relies inside chinas shadow banking the next subprime crisis on formal bank loans to reboot its pandemic-hit economy in order to prevent risk in the shadow bank of america investment banking system from flaring 2018 ibc code online again as in past recovery cycles.

As of end-September, core shadow banking assets, which include outstanding entrusted loans, trust loans and undiscounted bankers' acceptances, totaled 22.06 trillion yuan, down 2.8% from a year earlier, according to data from the People's Bank of China. September's contraction rate, however, was the lowest since the year-over-year decline of 2.31% in July 2018.

"We believe that the government will prioritize financial stability [.] rather than a headline growth number," Yong Hong Tan, portfolio manager at Eastspring Investments, told S&P Global Market Intelligence.

"Given the de-emphasis of a headline GDP growth target, it is unlikely shadow banking will be allowed to grow again and formal bank lending will continue to form the bulk of new credit lending in China as banks continue to provide financial support to businesses and investments," he said.

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Different approach

China's economy has rebounded from contraction earlier this year and is on track for full-year growth. The GDP of the world's second-largest nation increased by 0.7% over the first three quarters of 2020 from a year ago, compared with a 1.6% decline in the first half.

According to PBOC data, total outstanding yuan loans at Chinese financial institutions hit a record high of 169 trillion yuan in the quarter ending Sept. 30, driven by the government's call to lend more aggressively to the pandemic-hit economy.

"As banks increase lending quota for [small and medium enterprises] which used to borrow from shadow banking channels, we expect banks loan growth would continue to outpace total social financing growth," said Cindy Wang, an analyst at DBS Group Research. She added that shadow banking assets are likely to contract by single digits on a year-over-year basis until shadow banking risk subsides further.

Beijing has so far unwound very few measures that were put in place in 2017 and 2018 to contain the financial risk of the once fast-growing nonbank lenders, especially following high-profile defaults of trust companies such as Anxin Trust Co. Ltd. Major easing measures include postponing the execution of more stringent rules on asset management by one year to 2021.

Shrinking sizes

Among the core shadow banking activities, trust loans have been declining more quickly since the beginning of 2020, while entrusted loans contracted at slower rates and undiscounted bankers' acceptances rebounded compared to previous months.

In September, trust loans declined 8.5% to 7 trillion yuan from a year earlier, the biggest drop since the 8.6% year-over-year fall in March 2019, and entrusted loans shrank 5.2% in September from a year earlier.

Tan expects trust lending activities will remain hampered by recent defaults of several trust companies, the deterioration in trust asset quality, and the increasing risk aversion to weaker corporations amid economic uncertainty.

DBS' Wang added: "As banks are more willing to lend money to SMEs through supply chain financing or collateral loans with cheaper yield helped by policy supports, corporates prefer to borrow from banks instead of shadow banking channels due to cheaper funding costs.

"The trend would continue in 2021 given overall liquidity in the banking system is ample."

In contrast, undiscounted bankers' acceptances rose by 18.8%, the highest since October 2017.

"The rebound of undiscounted bank acceptance bills, yet the decrease in the discount bills on banks' balance sheet, reflect that corporates have substantive business activities with bills demand for transactions and payment purpose in 3Q20," Wang said. "We don't expect undiscounted bank acceptance bills would continue to grow strongly entering in inside chinas shadow banking the next subprime crisis as regulators remain to clap down shadow banking financing."

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More contraction expected

China's shadow banking capital one login page is likely to shrink further in 2021 as regulators continue to introduce restrictions for the sector. In August, China's Supreme Court slashed the legally protected ceiling of informal lending rate to promote a healthy and stable development of the private lending sector.

"The Supreme Court's lowering of interest rates on informal lending, including for microcredit, pawnshop loans and online peer-to-peer lending will close off an important financing channel for weaker companies as it makes it unprofitable for lenders," said Eastspring's Tan. "The government is getting stricter in controlling leverage in the property sector and the curbing of trust financing is one of the ways to achieve this in our view."

The China Banking and Insurance Regulatory Commission had told some trust companies to stop financing property developers that did not have all necessary licenses or met requirements on shareholders and capital, Caixin reported in July 2019. Some leading trust companies canceled trust products that planned to raise funds for property investments, the report said.

Even so, demand from borrowers who are not eligible to request loans from banks is likely to sustain throughout 2021, as China has delayed the implementation of more stringent rules on asset management from this year.

"Once banks' wealth management products [are] redesigned . the risks from shadow banking should be reduced and the overall financial market would be more healthy."

As of Nov. 4, US$1 was equivalent to 6.66 Chinese yuan.

Источник: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/china-s-shadow-banking-sector-may-shrink-further-as-economy-rebounds-61048109

Inside China's shadow banking : the next subprime crisis?, Joe Zhang
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Inside China's shadow banking : the next subprime crisis?, Joe Zhang

The Resource Inside China's shadow banking : the next subprime crisis?, Joe Zhang
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Inside China's shadow banking : the next subprime crisis?
Title
Inside China's shadow banking
Title remainder
the next subprime crisis?
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Joe Zhang
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eng
Summary
Is shadow banking in China likely to become the source of the next global financial crisis or simply a little understood area of the enormous Mainland economy? Joe Zhang pulls back the curtain on this sector and explains how shadow banking in China impacts the regional and world economies. He also pinpoints the areas of concern based on his experience in the field and his knowledge of the complicated regulations of banking in China gathered during his years as a staffer at the central People's Bank of China in Beijing. Drawing on his 11 years spent at UBS, as well as the work of prominent economists, Joe Zhang explains shadow banking in China for investors, economists, laypeople, and the general public. In 2001, Joe Zhang resigned as Deputy Head of China Investment Banking at UBS to become the chairman of a microcredit company in Guangzhou. This book is both his personal story and a frank assessment of the shadow banking industry in modern China --
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Zhang, Joe
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  • Cheng, Janet
  • Griffith, Glenn
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  • Banks and banking
  • Informal sector (Economics)
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Inside China's shadow banking : the next subprime crisis?, Joe Zhang
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"Edited by Janet Cheng and Glenn Griffith."--Top page verso
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text
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rdacontent.
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FIEb17498442
Dimensions
22 cm.
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English edition.
Extent
x, 166 pages
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9781623200176
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unmediated
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rdamedia.
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(OCoLC)844729245
Label
Inside China's shadow banking : the next subprime crisis?, Joe Zhang
Publication
Copyright
Note
"Edited by Janet Cheng and Glenn Griffith."--Top page verso
Bibliography note
Includes bibliographical references
Carrier category
volume
Carrier category code
Carrier MARC source
rdacarrier.
Content category
text
Content type code
Content type MARC source
rdacontent.
Control code
FIEb17498442
Dimensions
22 cm.
Edition
English edition.
Extent
x, 166 pages
Isbn
9781623200176
Media category
unmediated
Media MARC source
rdamedia.
Media type code
System control number
(OCoLC)844729245

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