China’s “shadow” shadow banking

CHINA ADVISORY - Report 03 Jun 2019 by Andrew Collier

We have just completed a two-day visit to Fuzhou, in Fujian Province, to examine local banks, investors, pawnshops and other non-bank institutions in the capital chain. We drew three conclusions:

1) The significant increase in non-bank lending has continued to grow since the original explosion of capital post-2007 financial crisis. These credit flows are integral to the growth of the Chinese economy because they provide needed capital for key areas such as 1) property that supports local government revenue; 2) SME’s that are responsible for the majority of employment in China; and 3) generally (but not always) go to the areas of the economy with the greatest return. We call this the “shadow” shadow banking because they are not part of the “official” shadow institutions such as the trusts, nor do they pass through banks as wealth management products, or are part of inter-bank borrowing. They are truly in the shadows. Although hard numbers are difficult to get, we estimate they could be as large as Rmb5-10 trillion, or approximately 5% of total lending.

2) These local financial flows, both bank and non-bank, often operate outside of the formal rules issued by the PBOC and the CBIRC. Interest rates, lending restrictions, and state backing are often interpreted very different than under the regulated system. Beijing says one thing but the economy does another…

3) The trade war was hardly a matter of discussion during our meetings. This is partly due to Fujian’s historical location near Taiwan, which has kept trade lower than expected given its coastal position, but it also reflects the importance of credit flows over the Trade War for the stability and growth of the economy.

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