photo: AFP
China has a parallel system of banking that is off the books, called shadow banking. This practice is usually employed when small businesses or interests borrow money off the books.
The portion of the banking sector that operates in this way, however, has risen 70% in the past couple of years. That is an amount that could pose some risks, although all banks in China are nationalized.
This practice allows borrowers to avoid the regulations and documents needed under state lending laws. The total volume of lending in this manner has reached 29 trillion yuan.
The practice is becoming more commonplace at a time when borrowing has become more difficult, and many people do not meet the standards imposed for lending money.
Without the 'shadow' lending, the economy could be threatened, because there would be no substantial growth. But it also comports some significant risks, the principal being that credit bubbles could form. In fact, one of the more vexing problems in China is the unfettered growth of the construction sector. Another is the number of small businesses or factories that are closing and are not able to repay their loans. Some of these small businesses are opened fraudulently and close quickly.
The growing concern then, is that these banks might not be able to shore themselves against the numerous defaults that such risky banking entails.
The government is trying to rein in such unregulated lending practices and has ordered stricter adherence to lending guidelines just recently.
Of course, the impact such lending will have is all tied to timing. If the losses all come at once, then it will be difficult to absorb the impact. But the data to predict such losses is unobtainable to the Western world, due to China's secrecy and lack of information sharing.
Partial source : 5.13.13
This practice allows borrowers to avoid the regulations and documents needed under state lending laws. The total volume of lending in this manner has reached 29 trillion yuan.
The practice is becoming more commonplace at a time when borrowing has become more difficult, and many people do not meet the standards imposed for lending money.
Without the 'shadow' lending, the economy could be threatened, because there would be no substantial growth. But it also comports some significant risks, the principal being that credit bubbles could form. In fact, one of the more vexing problems in China is the unfettered growth of the construction sector. Another is the number of small businesses or factories that are closing and are not able to repay their loans. Some of these small businesses are opened fraudulently and close quickly.
The growing concern then, is that these banks might not be able to shore themselves against the numerous defaults that such risky banking entails.
The government is trying to rein in such unregulated lending practices and has ordered stricter adherence to lending guidelines just recently.
Of course, the impact such lending will have is all tied to timing. If the losses all come at once, then it will be difficult to absorb the impact. But the data to predict such losses is unobtainable to the Western world, due to China's secrecy and lack of information sharing.
Partial source : 5.13.13
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