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Slowing growth would be the main worry in China’s economy — if only it weren’t for the more worrisome growth of credit. China’s services sector grew at the lowest rate in five years in January, Reuters reports, which was preceded last week worrisome manufacturing data.
Credit growth, particularly in China’s shadow banking system, may be the real danger. This week, Charlene Chu, an influential former Fitch analyst, echoed her warnings on China’s debt problems. Chu cited a lending sector that’s out of control, and an informal shadow banking system that’s intertwined with official Chinese banks. “There’s no way that we are not going to have massive problems in China,” she told the Telegraph.
Last week saw possible hints of those kind of problems. In what a BofA/Merrill analyst called China’s “Bear Stearns moment”, an unnamed investor bailed out a high-yield wealth management product called Credit Plus Equals Gold #1. (More on those products here). This kind of shadow banking bailout, Anne Stevenson-Yang writes, has become endemic in China:
So far every time a Chinese trust starts to fail, it is rescued at government behest. Most notable this time is that, first, there was any suspense whether China Credit Trust would be saved, and second, the total news blackout on the details of the bailout. Moral hazard is woven into the fabric of the Chinese financial system.
Xiao Geng and Andrew Sheng argue that China’s challenge is more than just slowing the growth of credit. They also argue that China will have to unify the shadow banking system, where rates for private business loans can hit 15%-20%, and the official lending system, where rates are around 5.5%-7%. The question, they write, is whether China’s borrowers, consumers and companies alike, can afford to repay their debts if rates rise.
David Keohane spots a note from JPMorgan that is a bit more cheery on China’s shadow banking world. As a percentage of domestic bank assets, China’s shadow banks are relatively small: America’s shadow banks equal 150% of total bank assets, while China’s are at 30%. And, unlike America’s pre-crisis shadow banking system, China’s is far simpler and its products are predominantly owned by the Chinese themselves.
Keohane has more on what China can and can’t do to fend off a shadow-banking crisis. As Stevenson-Yang puts it: “The government may talk about deleveraging and reform, but it continues to forbid bankruptcies, extend more credit and increase the money supply”. — Ryan McCarthy
On to today’s links:
Ben Bernanke has a new job – Brookings
“Economists no longer dare to assume that trend is trend and cycle is cycle” – Brad DeLong
Two possible triggers that led to the ongoing emerging markets rout – Cam Hui