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Slowing growth would be the main worry in Chinaâ€™s economy — if only it werenâ€™t for the more worrisome growth of credit. Chinaâ€™s services sector grew at the lowest rate in five years in January,Â Reuters reports, which was preceded last week worrisomeÂ manufacturing data.
Credit growth, particularly in Chinaâ€™s shadow banking system, may be the real danger. This week,Â Charlene Chu, an influential former Fitch analyst, echoedÂ her warningsÂ on Chinaâ€™s debt problems. Chu cited a lending sector thatâ€™s out of control, and an informal shadow banking system thatâ€™s intertwined with official Chinese banks. â€śThereâ€™s no way that we are not going to have massive problems in China,â€ť she told the Telegraph.
Last week saw possible hints of those kind of problems. In what a BofA/MerrillÂ analyst calledÂ Chinaâ€™s â€śBear Stearns momentâ€ť, an unnamed investor bailed out a high-yield wealth management product called Credit Plus Equals Gold #1. (More on those productsÂ here). This kind of shadow banking bailout,Â Anne Stevenson-YangÂ 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 ShengÂ argue that Chinaâ€™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 Chinaâ€™s borrowers, consumers and companiesÂ alike, can afford to repay their debts if rates rise.
David KeohaneÂ spots a note from JPMorgan that is a bit more cheery on Chinaâ€™s shadow banking world. As a percentage of domestic bank assets, Chinaâ€™s shadow banks are relatively small: Americaâ€™s shadow banks equal 150% of total bank assets, while Chinaâ€™s are at 30%. And, unlike Americaâ€™s pre-crisis shadow banking system, Chinaâ€™s is far simpler and its products are predominantly owned by the Chinese themselves.
KeohaneÂ has more on what China can and canâ€™t do to fend off a shadow-banking crisis. As Stevenson-Yang puts it: â€śThe government may talk about deleveraging and reform, but it continues to forbid bankruptcies, extend more credit and increase the money supplyâ€ť.Â – Ryan McCarthy
On to todayâ€™s links:
Ben Bernanke has a new job -Â Brookings
“Economists no longer dare to assume that trend is trend and cycle is cycle” -Â Brad DeLong
Two possible triggers that led to the ongoing emerging markets rout -Â Cam Hui