Shadow banking sector dangerously opaque
(20 June 2013 – China) A source believes that China’s shadow banking system is too opaque, allowing trusts, wealth management funds and offshore vehicles to avoid regulations and hide huge amounts of debt.
The source said shadow banking is creating China’s worst credit bubble and could case deflation.
The source noted that the credit-driven growth model is clearly falling apart and could feed into a massive overcapacity problem, and potentially into a Japanese-style deflation.
It also said there is no transparency in the shadow banking system, and systemic risk is rising.
The source also said it has no idea who the borrowers are, who the lenders are and what the quality of assets is and this undermines signaling.
China's credit has gone from US$9 trillion (A$9.4 trillion) at the peak the financial crisis to US$23 billion, and its ratio of credit to gross domestic product has spiked to 200 percent.
This is beyond anything the source has ever seen before in a large economy.
It doesn't know how this will play out and noted that the next six months will be crucial.
Ominously, the source said there is no way China can grow out of its asset problems as it did in the past. It thinks this will be very different from the banking crisis in the late 1990s.