Shadow banking risky

By Zhang Monan

The recent disastrous debt crisis that hit Wenzhou city, Zhejiang province, revealed a problem that is deeply rooted in China’s financial market and which challenges its stability. Shadow banking, being outside State supervision, challenges the stability of China’s financial market, because its inverted-pyramid financial structure could collapse at any time if there is a problem with its supporting funds.

Shadow banking has existed for a long time, but it has grown rapidly since the beginning of this year when the State tightened control of financial supply. As the tightening did not change demand, space was left for underground financing to expand. According to Japan-based Nomura Securities, the size of China’s shadow financing could amount to 8.5 trillion yuan (S$1.7 trillion). Liu Jigang, a researcher from ANZ bank, estimates it could even be as high as 10 trillion yuan. These estimates may not be accurate, but they nonetheless highlight the problem of shadow banking in China.

Shadow banking originated in the United States, with practitioners indefinitely expanding their credit loans by putting loans into the financial market. But it took a different form in China, where practitioners usually get loans from unofficial financial agencies like private lenders or underground banks. Both are unofficial and unsupervised.

Today shadow banking is already deeply intertwined with the US financial system, and it is now one of the main causes of risks. Credit Default Swaps (CDS) are a typical example, by changing the form of raising funds for mortgages they lowered the costs for house buyers, but introduced more bubbles into the US realty market.

In 1997, the CDS market totaled $180 billion, but it had soared to $6.2 trillion within nine years, accumulating enormous risks in the process, exemplified by the over-trading of CDS. Finally in 2008, with a fall in realty prices, the financial crisis was kindled and swept like wildfire through the US and the whole world.

Despite different practices, China’s shadow banking is nonetheless also potentially dangerous and destructive. For the past 30 years, China has generally maintained a typical indirect bank-led financing system, which owes 80 to 90 per cent of funds to banks in the form of loans. Within this relatively stable system, the central bank can estimate the supply of broad money (M2) and decide the size of the each year’s new loans from the GDP growth rate, so as to control the amount of money loaned.

But the situation has changed with deeper financialization of the economy. Various emerging financial tools, such as agencies that raise funds through securities and insurance, have increasingly taken a larger share of the banks’ role in the financial market.

None-bank loans were only 8.7 per cent of the total yuan loans in 2002, but had grown to 79.7 per cent in 2010. This growth in finance means the loan size is no longer an index of money supply-demand relations.

As shadow banking is not controlled by the State, many banks turn their loans into financial products through trust companies, which invest them in sectors with high returns but also with high risk.

The high returns attract more economic participants and even State-owned enterprises (SOEs) have joined the game. According to the Financial Times, several jumbo SOEs have financial platforms, while 90 per cent of all loan-lending enterprises are SOEs.

The shadow banking system now has an estimated annual fund flow of 2 trillion yuan, or 5 per cent of China’s GDP. If it continues to grow without control and supervision, China’s financing market will become increasing unstable in the near future, with possibly serious economic and social effects.

To limit the growth of shadow banking, China needs to properly deal with its relations with the official financing system. The urgent mission today is to keep a free flow of social funds within the official financing system, and to implement stricter supervision upon shadow banking, so as to solve the problem without causing grave shocks to the economy.

The author is an economic researcher with the State Information Center.










Article source: http://www.asiaone.com/Business/My+Money/Opinion/Story/A1Story20111024-306756.html

Share

Leave a Reply


Other News

  • FEATURED

    Zimbabwe appoints ex-Judge to investigate soccer scandal

    FORMER Supreme Court judge, Justice Ahmed Ebrahim will chair Zifa’s independent disciplinary committee, giving impetus to the final phase of the Asiagate scam that rocked local football in the last few years. The judge - who has previously worked in the Zimbabwe Cricket structures - will lead a seven-member committee that includes former Sport and Recreation Commission chairman Gibson Mashingaidze, ex-Zimbabwe Republic Police assistant commissioner Emmanuel Chimwanda, legal practitioners Tererai Gunje, John Reid- Rowland and Lewis Uriri and former Fifa [...]

    Read more →
  • FEATURED Morgan Tsvangirai wedding set for December

    Morgan Tsvangirai wedding set for December

    Headlines, News — By admin on October 25, 2011 2:15 am By Fortune Tazvida Nehanda Radio.com can exclusively reveal that Zimbabwean Prime Minister Morgan Tsvangirai is set to get married in December. The popular MDC leader’s wife, Susan, died in a highly suspicious car accident in March 2009 and since then speculation has centred on the woman who will fill that void. Tsvangirai with US-based Zimbabwean doctor Arikana Chihombori Previous reports have linked Tsvangirai to US-based Zimbabwean doctor Arikana Chihombori, [...]

    Read more →
  • FEATURED Zimbabwe PM backs gay rights

    Zimbabwe PM backs gay rights

    2011-10-24 22:30 Harare - Zimbabwean Prime Minister Morgan Tsvangirai said on Monday that he wants gay rights enshrined in a new constitution, but his spokesperson hastened to add that gays should “do their things in private”. But the remarks were a reversal for Tsvangirai, who last year had backed President Robert Mugabe‘s refusal to include gay rights in the charter currently being drafted. “It’s a very controversial subject in my part of the world. My attitude is that I hope [...]

    Read more →
  • FEATURED

    Diarrhea Outbreaks in Zimbabwe Revive Fears of Another Cholera Epidemic

    Diarrhea Outbreaks in Zimbabwe Revive Fears of Another Cholera Epidemic Fears of another cholera outbreak are on the rise in Harare where suburbs including Hatcliffe, Budiriro, Mount Pleasant, Tafara, Mabvuku, and Chizhanje have gone for weeks without clean water Sandra Nyaira Sithandekile Mhlanga | Washington Zimbabwean health officials are continuing to monitor diarrhea outbreaks in Masvingo and Kadoma while launching a major campaign to ensure that the water-borne disease which has claimed the lives of seven children is quickly contained. [...]

    Read more →
  • FEATURED

    Harare to Assume Air Zimbabwe’s US$140 Million Debt - Transport Minister

    Harare to Assume Air Zimbabwe’s US$140 Million Debt - Transport Minister The state-controlled Herald newspaper quotes Transport Minister Nicholas Goche as saying Harare will assume US$113 million in domestic and US$25 million in foreign debt of troubled Air Zimbabwe Gibbs Dube | Washington The Zimbabwean Cabinet has resolved that the Harare government should take over Air Zimbabwe’s debts of US$140 million and seek a strategic partner for the perennially troubled national airline, Transport Minister Nicholas Goche said this week. The [...]

    Read more →
  • FEATURED

    Spokesman for Zimbabwe’s Mugabe Now Cites ‘Differences’ With Gadhafi

    Spokesman for Zimbabwe’s Mugabe Now Cites ‘Differences’ With Gadhafi Despite what many took to be a tight relationship, the state-controlled Herald this week quoted Mugabe spokesman George Charamba as saying his boss and Gadhafi had sharp differences ‘founded on principles’ Violet Gonda | Washington Journalist Basildon Peta said: “Everything he is saying now should be taken with a drum of salt, not a pinch of salt. I cannot imagine any difference of principle between Mugabe and Gadhafi because they were [...]

    Read more →
  • FEATURED Govt assumes Air Zim’s US$140mln debt

    Govt assumes Air Zim’s US$140mln debt

    FEATURED Morgan Tsvangirai, Zimbabwe Prime Minister, Backs Gay Rights For New Constitution Though he’s previously supported his country’s notoriously hostile stance on gays and lesbians, Zimbabwe Prime Minister Morgan Tsvangirai now says he wants LGBT rights enshrined in new constitution, the BBC is reporting. At present, homosexual acts are currently prohibited in Zimbabwe, as they are in most African nations where homosexuality is seen as un-Christian and un-African. As Pink News is reporting, President Robert Mugabe has previously condemned LGBT [...]

    Read more →
  • FEATURED

    Zimbabwe: ‘Occupy’ Protests - West’s Double Standards

    By SPECIAL CORRESPONDENT Published: October 24, 2011 Share Published by the government of Zimbabwe Lloyd Gumbo and Tendai Manzvanzvike 24 October 2011 Mainstream media in the United States and Europe has come under fire for its double standards and for promoting capitalism by failing to give extensive and objective coverage of the on-going “Occupy Wall Street” protests. The protests which are in their fifth week have spread to more than 950 cities in 82 countries, mostly in Western nations. It [...]

    Read more →