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The firm behind one of the top China analysts in the world is warning of a ticking time bomb


Autonomous Research, the research firm focused on the financial sector, is warning of a ticking time bomb in China’s shadow financial system.

In a new video, the firm, which employs Charlene Chu, dubbed the “rock star” of Chinese debt analysis, said that China’s lenders piled up debt and repackaged much of it in the form of Wealth Management Products (WMP’s) and Asset Management Plans (AMP’s).

By the end of 2016, WMP’s and AMP’s together amounted to 51% of China’s GDP, according to Autonomous Research.

“WMPs and Chinese banks more generally have become so large and complex that any major problems could be just as destabilizing to the global economy as what occurred in 2008,” the video said. 

China has shown signs that it is aware of the risks that shadow banking presents. In a recent interview with Bloomberg, Chu stated that Beijing has shown a “surprisingly high appetite for pain” as it tries to curb some of the more egregious shadow banking practices.

Here’s the video explaining shadow banking in China:

And here’s a step-by-step explanation of the video:

'China's shadow finance system is often likened to a black hole, one that involves a confusing hodgepodge of acronyms and becomes more complex and opaque each year.'


'There are two forms of shadow credit in China. The first involves small lenders who extend credit to borrowers who can't obtain regular loans.'


'The second accounts for the majority of activity, and involves Chinese banks transferring credit from their own balance sheets into the shadows.'


'Why do this? Because keeping the asset could be damaging. For example, it may show that the bank has a large amount of loans that are bad.'


'In China, the offloading of assets by banks is referred to as channel business. There are two types of channel business: internal, meaning banks shift around the assets themselves, and external, in which banks enlist other entities to help them.'


'Internal channel business takes place through banks transferring assets into Wealth Management Products (WMPs), which the banks then sell to depositors and investors. This enables banks to bypass detailed assessments of the quality of the assets.'


'In the most common (external channel) transaction, banks sell loans to non-banks, who then package the loans into asset management plans (AMPs), which are then resold to banks. What previously had been a corporate loan now becomes an investment of the bank in AMPs.'


'At the end of 2016, $3.7 trillion in assets had been internally offloaded by Chinese banks into off-balance sheet WMPs, while another $1.9 trillion had been externally offloaded into AMPs.'


'Transferring assets into hidden channels distorts the data to assess the health of banks ... WMPs in particular could be ticking time bombs, due to their short maturities.'


'About 44,000 (WMPs) were outstanding at the end of 2016. This is nearly six times the number of outstanding mortgage-backed securities at western banks at the heart of the 2008 financial crisis.'


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