China’s shadow banking system has been feeling the heat from the deepening economic woes
From Bloomberg
China’s slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments. The slowdown also is putting pressure on the government to rein in private lending to avoid a spate of defaults that could increase the number of victims and lead to social unrest.
Suicide, Bankruptcy
The shadow bankers are now disappearing, committing suicide or reneging on agreements, leaving thousands of victims in their wake. In the first half of the year, more than 58,000 lawsuits involving disputes over 28.4 billion yuan in private lending were filed in Zhejiang province, where Wenzhou is located, up 27 percent from the same period in 2011 and the most in five years, according to the provincial supreme court. One-fifth of the cases were in Wenzhou, where authorities have set up a special court to handle the surge.
Private-lending victims nationwide filed more than 600,000 lawsuits valued at 110 billion yuan in 2011, an increase of 38 percent from the previous year. In the first half of 2012, the number of filings rose 25 percent to 376,000, according to People’s Court, a newspaper run by China’s Supreme Court.
In Wenzhou, an export hub where almost 90 percent of families have taken part in underground lending, more than 100 people have fled, committed suicide or declared bankruptcy since August 2011, and at least 800 lending brokers have gone bankrupt, Xinhua News Agency reported in May. Home prices there declined 16 percent in July compared with a year earlier, the fifth consecutive monthly decline, according to the National Bureau of Statistics of China.
China’s shadow banking system hasn’t been just the private informal sector but likewise involves state owned enterprises (SoE) and financing vehicles established by local governments. From the same article
The lending is part of a shadow-banking system that also includes the off-balance-sheet business of banks and trust companies and totals as much as $2.4 trillion, about one-third of China’s official loan market, according to estimates by Societe Generale. Shadow banking is prevalent in China because more than 90 percent of the nation’s 42 million small businesses are unable to get bank loans, while such investments offer returns at least several times higher than deposits.
As I previously pointed out since mainstream banks have been dominated by the state, where access to credit has been biased towards non-finance state owned companies
State banks discriminate in terms of lending where “only four percent of their loans to private businesses”. Thus, the recourse of private businesses has been through the informal or shadow banking systems. Ironically, transacting with unofficial credit markets “can be a criminal offense punished by long jail terms or worse”
The natural consequence has been that private savings resorted to alternative channels to employ their funds for profit.
Evidence from the same article,
Still, households and families nationwide withdrew 500.6 billion yuan of saving from banks in July, or 0.6 percent of the total. Chinese savers seeking higher returns have triggered swings in deposits during the past year as they’ve shifted funds among savings accounts, higher-yielding wealth-management products and shadow-banking investments.
About 619 million yuan of capital has been registered at the Wenzhou Private Lending Registration Center, which was set up in April to help control shadow lending by matching individuals holding excess capital with small businesses in need of funds. As of July, less than 10 percent of that was loaned out, even with collateral, according to the city government.
While China’s savings rate of more than 50 percent of gross domestic product is the highest among major economies, exceeding India’s 34 percent and 12 percent in the U.S., according to a June 2010 Bank for International Settlements report, people have few legitimate investment options for their deposits.
Retirees such as He can’t take advantage of annuities, IRAs or other such products to derive income in their old age. China’s pension program, like Social Security in the U.S., typically provides payments that don’t meet monthly expenses.
The nation’s stock market also is lackluster, and the bond market is largely off-limits to individual investors. The Shanghai Composite Index (SHPROP) has declined 3.3 percent this year after losing 14 percent in 2010 and 22 percent in 2011.
One obvious outcome from the stringent regulations by China’s authorities on the financial industry has been the underdeveloped domestic capital markets.
(charts from Business Insider)
Again since the world does not operate on a vacuum, given the limited access to credit from mainstream banks, negative real rates monetary regime and largely limited capital markets, China’s private sector savers engaged the shadow banking system by jumping on property bubble spurred by China’s government’s credit driven (left window) capital-infrastructure spending ‘socialization of investment’ boom.
Anecdotal proof from the same article,
Only 30 percent of the funds in Wenzhou’s shadow-banking market have gone to finance small companies, while 60 percent went to property speculation and re-lending, pushing up the cost of funds by end-users, the Wenzhou branch of People’s Bank of China said last year. The city’s economy expanded 5 percent in the first half, the slowest in three years.
That boom seems to be collapsing (chart above right window).
As of last week China’s government has re-engaged in the same fiscal stimulus through infrastructure spending but at a much lesser amount ($157 billion) compared to 2008-2009.
Also China has reportedly stepped up bank lending, reports the Botswana Gazette,
China ramped up bank lending in August, according to central bank figures released Tuesday, as the government seeks to give a boost to the slowing economy.
Chinese banks granted 703.9 billion yuan ($112 billion) in new loans in August, up from 540.1 billion yuan in July, the People's Bank of China said in a statement.
The August figure is higher than market expectations of 600 billion yuan, according to a forecast of 13 economists surveyed by Dow Jones Newswires.
Analysts said the increase in bank lending reflects China's moves to ease monetary policy with economic growth at its slowest pace in three years.
Given that these loans are likely directed towards China’s state owned enterprises, it’s not clear if these money easing will filter into the seemingly insolvent shadow banking system
My guess is that given the Keynesian leaning policies by China’s incumbent political authorities, the above rescue measures could be just installments.
Besides, given that the ECB and the Fed has both declared the next moves to expand their balance sheets, China’s authorities may find comfort in crowd, and thus, more easing moves should be expected.
It’s just a reminder that all these inflationism by global central banks will only temporarily provide a boost to financial markets, does nothing to help the economy (except to redistribute resources to the political and the banking class) and at worst amplify the risks of global stagflation.
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