china on its knee's…..

China shadow banking crisis unfolding……AUD will plompt against the US with debt of china going to blow up in there faces….though this will be good for AUD gold miners as Gold is traded in USD.


China's shadow-banking sector a growing problem for booming economy facing inevitable slowdown

Experts are warning China's surging economy could be derailed by a debt crisis arising from it reliance on the so-called shadow-banking sector.

China's big banks have strict lending requirements and give preference to large state-owned enterprises, forcing many companies and even government entities to look elsewhere for loans.

Inevitably they turn to the shadow-banking sector.

There are no exact figures but the sector is estimated at being the equivalent of 40 per cent of China's gross domestic product (GDP).

"Shadow banking is the financial activity that exists outside the formal banking sector," said Michael Pettis, a former Wall Street banker who now works for Peking University.

"So it includes things like wealth-management products, it includes pawn shops, it includes a wide variety of things - but basically it's the non-regulated part of the banking sector."

Unprecedented China growth has come at a cost

China's explosion of development has, for decades, astonished observers. Even successive global economic crises have not stopped the country charging ahead.

But there are those who say that this growth is now being built on an ever-growing reliance on debt that will be difficult to repay.

It is unknown how many companies in China are taking out loans to cover their existing repayments.

Some say that only 30 per cent of corporate borrowers could repay loans without new credit.

According to certain estimates this has pushed China's total debt from 125 per cent of GDP in 2008 to more than 215 per cent now.

That would be an increase in borrowings of $15 trillion, the size of the entire United States commercial banking sector

"There's been an increasing sense that a lot of borrowing is simply going to protect existing borrowers from going bankrupt," Mr Pettis said.

How does China handle a fallout?

The Chinese government has levers it can pull which are not available to its Western counterparts.

A fair proportion of shadow banking finance is being hived off the main banks' central funds as a kind of side-business.

These banks are all government owned, so they can be told to reduce such activity.

All financial institutions can also be ordered to simply take more care when handing out loans.

But the question now is how to manage the debt, as well as the shadow-financing institutions that have been handing out so many of the loans.

The pessimists are warning of tough times ahead for China, but the optimists think authorities can still manage an economy with stable and significant growth well into the future.

If the Chinese government cracks down too quickly on the shadow banks, it will cause panic that could really harm the economy.

If it moves too slowly, debt will continue to balloon.

The ABC asked China's reserve bank, the People's Bank of China, how worried it is about the debt coming from shadow banking.

"We need to actively lead shadow banking to develop in a positive direction and to monitor the relevant risks so it can better serve a steady operation of finance and the development of the real economy," said Sheng Songcheng, the head of the statistics department at the Bank of China.

Some loans simply won't be recovered

The Agricultural Bank of China believes around 10 to 15 per cent of China's shadow-banking loans will not be recovered, but those losses will be spread over perhaps a decade.

That would allow the losses to be easily absorbed, yet there will be pain.

The bank's Xiang Songzuo says it is inevitable that some enterprises will close down.

"Take industries like the steel industry, shipyards, aluminium - some enterprises in those industries will be shut down," he said.

"If they do close, it will actually relieve the banks a bit. Yet it's inevitable that the banks will take some losses."

How will it affect Australia?

Less steel production, less shipyards would mean less imports of Australian coal and iron ore.

China's largest steel-producing province, Hebei, will cut one-third of its iron and steel production over the next five years.

Some see this as a positive sign that the government is reining in overcapacity and associated bad debts, but, in the short term, that is not good for Australia.

Economist Stephen Joske used to work for the Reserve Bank of Australia. He now runs Australian Super's China operations.

He sees shadow banking, in part, as a challenge to the heavy regulation of borrowing and lending interest rates in China in order to protect the big banks.

"The non-bank lending is actually one path to getting more market signals into the financial system which is why it's being encouraged," Mr Joske said.

Yet, like just about everyone, Mr Joske says there is no doubt that quite a lot of shadow bank lending simply has to be reduced.

"It's reached the stage where there've been rapid increases in recent years in non-bank lending and the government is going to have to wind that back in," he said.

"With the figures we've got now, it looks like they've got quite a long way to go further this year winding back the non-bank lending."

Perhaps the biggest challenge for policy makers is to convince everyone that a slower but more stable Chinese growth is a better long-term outcome than unbridled expansion.

"We reached a point maybe five years ago, maybe 10 years ago, maybe 15 years ago – depending on who you speak to – in which the level of investment in China was more or less the right level given its stage of development," Mr Pettis said.

"But it continued increasing investment into manufacturing capacity to the point where we have excess manufacturing capacity in a wide variety of industries.

"It increased infrastructure spending and real estate development well beyond the needs of China.

"So basically what that means is that an increasing amount of capital has been allocated into projects in which the real economic value of the project is less than the cost of the investment."

http://www.abc.net.au/news/2014-01-24/china-shadow-banking-loans-finance-money-borrowing/5218162?section=business