China's Shadow Banking Risks Are Spreading Through The Financial System

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Wenzhou of Zhejiang province is one of the most, if not the most, entrepreneurial places in China. It also happens to be the place where many of the shadow banking mess in China is concentrated in.  We have mentioned loan sharks, trusts, and mutual credit guarantees, some of the elements of the informal lending system in China which are all pretty common in this entrepreneurial place. Of course, the shadow banking system and the formal banking system are intricately linked in a way that is not always fully understood.

To cut the long story short, a lot of funds within the shadow banking system originated from the formal banking system either through banks selling wealth management products to customers or through banks’ off-balance sheet vehicles.  Because these shadow banking activities are not always legal, we knew little about them except that the shadow and formal banking sectors are intricately linked.  Because of these links, it is not hard at all to imagine that risks of a blow-up in the shadow banking system would spread to the formal banking sector.

At the national level, amount of NPL and NPL ratio are both rising, with the increase concentrated in small and medium sized businesses in Pearl River Delta and Yangtze River Delta regions as external demand weakens on European recession.According to Economic Information, there are signs that troubles within the shadow banking system start to surface in formal banking system.

Non-performing loans in Zhejiang banks continued to rise.  Investigations by the regulatory authorities looked at 170 companies which obtained loans from banks, and found that 70% of these companies under investigation had signs of over-capacity, involvement in real estate investment and informal lending, with 90% of loans classified as “bad”.  In fact, non-performing loans have been rising in Wenzhou for 11 consecutive months to RMB4.5 billion, with the NPL ratio at 2.43% at the end of May, and far higher than the national average (if both numbers are to be trusted, of course).

The problem does not look very huge at the moment, but this is clear that risks in the shadow banking are spreading to the formal banking system.  Slowly, but surely.

This article originally appeared here: Signs of shadow banking problems surfacing in formal banking system
Also sprach Analyst – World & China Economy, Global Finance, Real Estate


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