Wednesday, May 25, 2022

Debt and Credit Soar in China, Mainly Outside the Banking System

Debt and Credit Soar in China, Mainly Outside the Banking System

China appears to have bigger problems than regulating its bitcoin industry — there are concerns over debt building up across the rest of the economy. There are also signs companies and households are increasingly turning to the “shadow banking” industry for credit.

Also read: ATMs in India Are out of Cash After Gov’t ‘Demonetization Drive’

According to a Reuters report on the weekend, China’s attempts to slow down debt accumulation led to fewer bank loans. Economic planners fear a housing bubble.

However, debt continued to mount at alarming rates in other sectors of the economy, including household debt and borrowing outside the formal banking system.

Since the beginning of 2017, the government has raised interest rates at traditional financial institutions. Local city governments have also tried to discourage speculation in the housing market with new laws against “flipping” properties.

Government Wants to Limit Asset Bubbles

As cryptocurrency followers are aware, the People’s Bank of China (PBOC) is also trying to limit speculative activities at trading exchanges. There’s a new ban on margin and fee-free trading, new KYC/AML requirements, and restrictions on withdrawals. This probably has less to do with capital outflows from the country and more with fear of investment bubbles.

Chinese yuan bills notes moneyReuters noted that an indicator of all credit and liquidity in the Chinese economy, called “total social financing” (TSF) actually grew by a staggering amount.

That total grew by nearly 1 trillion CNY in March to 2.12 trillion (US $307.9 billion). If banks are lending less, that suggests an uptick in credit from the country’s shadow banking industry.

“Shadow banking” refers to financial institutions less-regulated by monitors, such as hedge funds and unlisted investment instruments. Though they create (often risky) credit that contributes to the nation’s total, they’re not subject to the same kind of capital requirements as banks that take deposits.

Shadow banking also includes peer-to-peer and short-term lenders, and mortgage brokers. The U.S. regulates its own shadow banking industry closer after the 2007-08 financial crisis.

However, while loans to companies accounted for 368.6 billion CNY (US $53.5bn) of the March TSF total, household debt was more than double that. Much of that is coming from non-bank institutions.

As a result, it’s likely the Chinese government will clamp down further on the shadow banking industry in the coming months.

Debt Not Just a Chinese Concern

Mounting debt isn’t just a worry in China — as we reported last week, combined global debt from all borrowers now stands around $215 trillion USD. Even after removing governments’ share of that, it’s a startling amount. Any hint that creditors might want to start collecting on their loans could cause a crisis, or a severe restriction on credit availability.

Reuters said the Chinese government is putting top priority on containing financial risks in 2017, particularly asset bubbles. This could explain in part the PBOC’s new-found interest in bitcoin exchange activities, as BTC prices hit all-time highs.

However it faces a dilemma as it also wants the economy to keep growing at over 6 percent a year. That doesn’t happen without relatively easy access to credit.

Are economies around the world in danger from excessive debt? Or doesn’t it matter? Let us know in the comments.

Images via Pixabay

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