Chinese ’shadow debt’ an $18.5 TRILLION market which could COLLAPSE the banking system

Friday, December 29, 2017
By Paul Martin

AN INVESTIGATION into China’s shadow banking sector has revealed how the threat posed by the country’s rapid accumulation of debt could push Beijing towards a financial crisis.

Fri, Dec 29, 2017

Shadow debt broadly refers to a type of wealth management products (WMPs) that are sold off the books to China’s swelling middle-class as they look for risk-free savings options preferable to the gambling culture of the stock market while offering superior returns when compared to the savings rates offered by banks.

Savers are usually offered terms of around 10 per cent for investments around £500,000 by private wealth manager at the bank.

These financial instruments have ballooned into a $18.5trillion market and include everything from investments in commercial property to a small business or a corporate bond.

But this snake-oil market of invisible investments is only made possible by a willing customer base still navel-gazing over their role in China’s economic growth.

And no project is deemed worthless.

Last year, when the Financial Times asked a WMP saleswoman at an investment bank where their money would be going, the salesperson is reported to have replied: “I think it’s a bridge in Nanjing.”

Conducted outside the normal banking system, lending like this is at the heart of China’s massive shadow banking industry.

For China’s rulers, the fear is that there may be more bad loans in the shadows of the financial system. The danger is that a big default or series of loan losses could devastate the world’s second-biggest economy, leading to a sudden halt in bank lending.

But customers remain willing with enthusiasm for WMPs based on the belief that China’s economic growth will go on forever, and the huge misconception that because these investments are usually bought at major banks, the Chinese government itself is actually backing these investments.

Beijing has acknowledged that the colossal volume of complex and potentially risky lending obscured in shadow banking compounds the threat posed by the economy’s tremendous accumulation of debt since the global financial crisis.

The most infamous WMP, The Chang’an Trust product was one of countless so-called wealth management products sold to investors to help raise money for a massive wave of lending in China that began in the aftermath of the 2008 global financial crisis.

The Reuters investigation shows how the trust’s widely publicised default burnt China’s middle-class savers who are unlikely to get their money back. In a written response, Chang’an told the agency: “This case is currently being processed by the courts. Please wait for the judgment.”

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