China’s leaders fret over debts lurking in shadow banking system

As they should. As we all should worry about the debt piling up around the world. But China, the Ultimate Crony Capitalist State may be especially prone to a debt driven crisis.

(From Reuters)

The two couples sank about 5 million yuan (about $762,000) into the investment product, which offered 9.5 percent annual interest over two years – substantially higher than the 3.75 percent they could earn on a fixed, two-year deposit at the same bank. Xing’s sister said she sold a property for 3 million yuan to fund her investment. The two families say they didn’t know exactly where the money was going at the time. When the contracts arrived weeks later, it turned out they had entered China’s $9.8 trillion shadow banking industry.

By December 2015, the interest payment for the second year was already well overdue and the couples were worried. “Then the sky came crashing down,” Xing said. “The money was gone, a couple of million.”

Everbright had actually sold the two couples a stake in Chang’an Trust Coal Industry Resource Investment Fund Three – A Collective Investment Fund Plan. Their money had been lent to a coal miner that soon went bust. 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…

This was in the wake of the 2015 summer market swoon in China.

…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 cascade through the world’s second-biggest economy, leading to a sudden halt in bank lending.

Top leaders in Beijing have 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. So far there have been relatively few defaults like the Chang’an product. Some regional banks have been restructured after a spike in shadow loan failures.

Financial risk also poses a formidable challenge for the Communist Party. At a top level conference in July, party leader Xi Jinping declared that financial security was vital to national security.

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