It's always something, isn't it? We're still cleaning up the mess from the massive debt-fueled housing bubble in the US when suddenly we've got to deal with Europe's public finances. We haven't even gotten started on that one when a third debt debacle starts rumbling, in China.
We all know by now the standard-issue worry about China -- too much debt-fueled building too fast, raising the risk of a hard landing. There's an additional wrinkle to the story, too, one that might be more worrying, as it has a bit of the feel of the subprime mortgage debacle that took down the global economy just a few years ago.
We're talking about a large, off-balance-sheet world of debt, China's 'shadow banking' system, which has grown to make up about 22% of all new financing in China, Barclays Capital reports.
The system is made up partly of bank loans,trust companies that 'sell wealth-management products to the public,' Barclays writes, while also doing some lending on the side, along with similar loans using banks as intermediaries. This lending helps finance infrastructure, industrial and commercial projects and real estate.
This corner of the market is poorly regulated and opaque, raising worries about what dangers lurk within.
Barclays economists today write that they don't yet see it as an existential threat -- though it poses serious threats:
We believe the bottom line is that we might see a wave of redemptions in the coming year. Although many of the shadow banking-funded projects might remain financially sound, even isolated cases of default could lead to widespread redemption, since individual investors have little clear information about the financial positions of the projects in which they invested. This also means that in the short term, the amount of trust lending is likely to decline, while more money may flow back to the banking system in the form of deposits.
Finally, will such developments lead to systemic economic and financial risks? At this stage, it looks very unlikely to us. Both trust and entrusted loans have limited direct-risk exposure to the commercial banks. Banks' direct involvement in trust lending is low (except for the development of 'Bank-trust cooperation products' which is now under strict regulations), as individuals as a rule do not borrow to invest in wealth management products. Banks do act as intermediaries for entrusted loans. But the funds are from designated deposits by corporations, not from the banks' own deposits. If such lending defaulted, then individuals and corporations would incur significant financial losses, but this would not add directly to the nonperforming loans (NPLs) of the commercial banks. Losses by individual investors could cause significant social and political tensions, however, which could eventually require intervention by the regulators or even the government.
But, of course, the commercial banks and other financial institutions cannot be entirely insulated from these developments. For instance, while defaults of trust loans borrowed by property developers would not cause an increase in NPLs, property developers already borrow quite massively from the banks, accounting for about 8% of total bank credit. If property developers face redemption from investors, then their ability to repay bank loans would be seriously affected. Similarly, SMEs still borrow a large volume of loans with the banks, accounting for about 22% of total outstanding loans. So the second-round effect could increase NPLs at the banks.
Therefore, the risks inherent in shadow banking are high at the moment, as housing prices decline and economic growth moderates. Defaults of some projects could lead to widespread redemption. It is possible that the size of trust financing might actually fall in relative terms. Investors, including both individuals and corporations, will likely suffer significant financial losses. Risks for financial institutions may also rise, as an indirect result of deterioration of trust financing conditions. In the short term, however, these are unlikely to represent systemic financial risks, at least in the immediate future, as we will probably not see the vicious cycle among falling asset prices, deteriorating balance sheets and forced selling-off in China. By contrast, social and political tensions might be a bigger worry. Of course, if deterioration of trust financing persists, especially if it is accompanied by a steep hard landing of the economy and a deep correction of housing prices, then the financial risks are bound to turn systemic.
2011-10-28 14:33 编辑：claudiaenglish