China's shadow finaning system. Central Bank takes major steps

by Ericwt Tue Jun 25, 2013 9:24 pm

During the current month of June we had the occasion to attend a unique and engaging Chinese Shadows show: although markets have been gradually shaken by surging Interbank lending rates, the People’s Bank of China (PBoC) was absent. The Central Bank is sending a clear political message to Banks, making it clear that it intends to regain full control over the banking system. Despite a partial intervention on Friday to calm down markets and investors, the shift in policy should be just at the beginning.
The expansion of credit in the second-largest world economy has reached levels of concern, exasperated by an uncommon shadow-financing system that is more and more out of State’s control.

The state-owned big companies have an enormous political and economical influence and they can have an easy access to credit (mostly by state-owned Banks). The feeble domestic demand and the slowing export in a country that is burdened by production overcapacity push those companies to invest borrowed money in “creative finance”, that often results in lending to smaller companies. Medium and small firms, in turn, have to deal with the constraints of an economical structure where too many segments are still in the hands of the central state, what makes it more difficult for them to achieve the diversification and adaptation levels that a globalized economy requires and adds to the risk that the circulating credits flow towards the creation of asset bubbles.
The next moves of Chinese leaders will be of extreme importance: markets can absorb volatility and even bad news and economic data, as long as the Chinese leadership manages to maintain its credibility.
The new President of China Xi Jinping, by many seen as the man who can boost liberalizations in the country, will have to pilot the big Chinese boat between the dangers of credit bubbles and credit crunch. A task for a great helmsman!

http://www.worldandmarkettrends.com/2013/06/during-current-month-of-june-we-had.html#.Ucnevdh68fh