Friday, March 07, 2014

Shadow banking

Over the past 5 years, banks in China have been repackaging their loans and selling them to trust companies who would then sell them on as a wealth management product offering juicy returns, sometimes as much as 40%. This rise of this "shadow banking" system has worried analysts as the banking sector has extended around $15trn credit since 2009. This year, Industrial and Commercial Bank of China (ICBC) refused to safeguard a $300m trust which it had sold to its customers. In the end, default was averted but alarm bells are ringing about a possible Chinese Bear Stearns moment.

Consider this conversation between a foreign investor and a Chinese credit analyst whose company analyses trust products:

Q: How do you analyse the credit risk of the local governments who've bought a third of the trust products?
A: We don't.
Q: Why not?
A: If they were to fail, it would mean the central government had failed. Beijing cannot fail.
Q: What do you think of the credit risk of the property related trusts?
A: The credit risk of those exposed to the 3-5 tier cities looks very poor.
Q: So have you rated them as poor?
A: No.
Q: Why not?
A: If those property markets were to fail, the local governments there would fail. If those local; governments fail, Beijing fails. Beijing cannot fail. QED the property market cannot fail.
Q: Where would you put your own money?
A: In Canada.


Anonymous kinglear said...

I suppose in a strange way he is right. As long as it is a closed system, the central government can simply " print" - and I use this in the loosest sense - money to cover it. What the consequences would be are hard to fathom. Either way, Canada looks a better bet!

12:18 pm  
Blogger Eurodog said...

"Beijing cannot fail", this should be our mantra.

2:04 pm  
Blogger Angus said...

Chaori Solar the first default in 17 years. Guess it says something Confucian about elevating an elephant by means of mirrors. What it means for the SPX is intriguing.

8:48 pm  
Blogger Winchester whisperer said...

At some point it will go horribly wrong if they don't allow defaults, KL.
Yes Angus - defaults have to be the way forward for them if they want to open their financial markets further.

10:04 am  
Anonymous kinglear said...

Or they do it the Spanish way......

11:32 am  
Blogger janerowena said...

It sounds to me as if they are due for a financial crisis of major proportions a few years down the line, exactly the same scenario as we experienced but by another name. I can remember reading the financial times years ago and wondering how on earth any large company could truly keep track of its assets, and the answer is, they can't.

10:48 am  

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