China’s Banking System Now World’s Largest, But Not All Chinese Leaders Happy
The chinese banking system has become the world’s largest, according to one recent estimate. The significant increase in the size and scope of the Chinese banking industry is due in large part to dramatically growing loan growth. Strong lending – estimated by the Peoples Bank of China to be over RMB 2 trillion in January of 2017 alone – has been boosting China’s banking sector, but a delicate dichotomy exists. Chinese central planners like a small group to have centralized control over money supply. But other economic planners are concerned the economy is too dependent on the banking sector.
chinese banking system and shadow banking adds complexity to the problem in China
China’s banking system ended 2016 at a record $33 trillion, analysis from the Financial Times shows. This compares with the Europe’s $31 trillion and the US $16 trillion while Japan tallied $7 trillion in assets.
Understanding China’s banking system is done, in part, by recognizing its system is more than 3.1 times the size of the country’s annual economic output. This compares to 2.8 times for the eurozone and its banks, spotlighting a leveraged differential.
In 2010 “shadow banking” in China – bank-like bank like functions such as lending off-balance sheet or otherwise in an unregulated fashion – has boomed and is now estimated at $3 trillion, according to a Reuters report.
Shadow banking accounts for nearly a fifth of total outstanding loans in the world’s second largest economy. The fragility this places the system under is a concern. “We see a policy-induced drastic deleveraging in shadow banking as a policy miscalculation that could trigger unexpected tail risks for the banking sector,” Liao Qiang, credit analyst at S&P Global Ratings, told Reuters.
The PBOC warned last month that many Chinese banks need to make clearer distinctions between on- and off- balance sheet assets, a task that is complicated due to the implicit guarantees. Banks have provided frequent bailouts for off-balance sheet products, a Financial Times report noted, but this policy could be shifting as central planners plan to move away from an economic stimulus approach to a risk management plan, particularly given the large leverage increase the Asian nation has witnessed recently.
“There’s a lot of hidden sovereign credit within the corporate loans on bank balance sheets, which can distort the picture when you do a cross-country comparison,” Hou Wei, China banks analyst at Sanford C Bernstein in Hong Kong told the FT. “In most other markets, governments just borrow directly from capital markets. In China, it’s a unique situation.”
chinese banking system and the delicate balance
Banks have been the primary point of stimulus delivery into the economy, but the leverage has left economic analysts concerned.
Economic stimulus is now seen as “leading to significant wasteful investment, industrial overcapacity and dangerous debt levels,” the FT noted. To finance economic expansion, central planners relied on banks to be loose with credit, providing working capital to firms but also saddling corporates with a debt overhang.
“The massive size of China’s banking system is less a cause for celebration than a sign of an economy overly dependent on bank-financed investment, beset by inefficient resource allocation, and subject to enormous credit risks,” Eswar Prasad, an economist at Cornell University and former China head of the International Monetary Fund, told the FT.
Communist party leaders, on one hand, like a small group of banks controlling capital markets due to efficient management of asset flows. Limiting capital outflows, for instance, has been a primary concern inside the Asian nation. At the same time, however, they fret the economy has become too dependent on a small number of banks.
“The Chinese government’s ambivalent approach to financial markets — seeing them as a useful resource-allocation mechanism but unwilling to let them operate freely, with the ostensible aim of maintaining stability and control — has often added to market volatility and made them less efficient,” Prasad was quoted as saying.
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Source: valuewalk
