Global management consulting firm Oliver Wyman along with Hong Kong-based think-tank Fung Global Institute has released a report into China’s shadow banking system, Bringing Light Into the Shadow, which concludes that some market and economic fears about an imminent collapse are overblown.
The report does however note that “urgent attention is required to pre-empt any escalation of shadow banking non-performing loans (NPLs), which could pose a negative implications to the system.”
But tempering pessimism on the outlook, Oliver Wyman said that the findings of the report “take a more measured view of shadow banking’s potential for harm”,
One of the interesting aspects of the report is that it says that most attempts to size the shadow banking system, and thus the implied threat to the Chinese and global economies, miss the mark because they double, and in some case, triple count exposures.
Cliff Sheng, head of Oliver Wyman’s greater China market, said that:
“Using a ‘source’ and ‘use’ of funds approach to address these overlaps, we size the market at RMB 31 TN, significantly lower than the outcome of a standard aggregation approach, which comes to about RMB 40-60 TN.”
The key findings of the report are:
- China is actually starting from a position of relative strength. When taking a national balance sheet approach, China’s sovereign balance sheet has a positive net asset position of RMB 87 TN (184% of GDP), even after accounting for all gross liabilities.
- Widely published corporate debt/GDP ratios are inflated, as most approaches do not take into account the vast deposits held by Chinese corporates.
- China is a net lender to the rest of the world and so any emerging debt problem will be a domestic one without global systemic implications.
- The Chinese household sector does not have a debt overhang. Chinese household financial liabilities represent only 9% of total net wealth of RMB 149 TN and less than half of total bank deposits, and mortgage indebtedness of RMB 8 TN is less than 10% of the estimated value of household ownership of real estate of RMB 96 TN.
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