Shadow Banking Industry in China Saturated by Investors Seeking Yield

[Corey Dutton]

The Economist featured a fascinating and well researched article in May’s print edition called, “Shadow Banking in China: Battling the Darkness.” This piece outlines how non-bank lending has grown in China in recent years, hinting that a credit bubble has been mounting for quite some time.

Ten years ago, all lending in China was via a network of state-owned banks that were under strict regulations. In recent years “shadow banks” have emerged to provide credit in the form of trusts, leasing companies, money-market funds, and others. Because so many investors have entered the shadow banking industry seeking yield, competition has increased to a point where interest rates have been pushed down from an average rate of 15% down to 10%.

Borrowers from shadow banks are companies in industries like real estate or steel where the government is seeing “overinvestment,” and likewise where state-owned banks have slowed lending or stopped lending altogether. As China’s economic growth has slowed, insiders are concerned that many of these shadow banking loans will have to be extended beyond their maturity dates, or go into default. This in turn may cause a “run” on the shadow banking sector as a whole and cause a wave of instability in the credit market in China. Read the entire article at the link below.

(Source: http://www.economist.com/news/finance-and-economics/21601872-every-time-regulators-curb-one-form-non-bank-lending-another-begins)

Posted by Corey Curwick Dutton