China Shadow Banking Concerns Grow

By John Richardson

Is the Chinese financial system on the brink of its equivalent of the US sub-prime crisis?

This is a concern we raised last week in this first post, and a second post, on China’s shadow-banking system.

This article from the Wall Street Journal provides more evidence of the risks ahead.

The chart below shows the rapid growth in wealth-management products (WMPs) issued by the state-owned banks anxious to boost their deposit ratios. WMPs are linked to the shadow-banking system.

Presentation1.pngAt the end of every year, when regulatory reviews are imminent, there is usually a race to boost deposit ratios, says the WSJ.

“But what makes this year different is that “competition is fiercer because banks are facing tighter funding conditions,” the article adds.

“The rapidly growing WMP market is causing concern among regulators. WMPs are pools of stocks, bonds, currencies or loans, repackaged by banks and marketed to their customers, much as mortgages were repackaged into securities for investors in the US before the financial crisis.”

We interviewed a senior petrochemicals industry executive a few months ago who told us everything was fine in China because it had a strong government that “gets things done”.

This is not the case, we think, because of the way the system works, as we shall explore tomorrow. There are many competing interests pulling in different directions. For instance, in some cases the state-owned banks and state-owned enterprises have more power than the government ministries which are supposed to control them.

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