IMF Calls For Urgent Changes To China’s Economic Policies The unknown here is the size of China's "shadow banking" sector and its health. Too many bad loans?

By Paolo von Schirach

July 18, 2013

WASHINGTON – The International Monetary Fund, IMF,¬†delivered a pretty strong warning to China. In a just released report it stated that it is “increasingly urgent” for China to shift away from its economic growth model based on easy credit and investments. Beyond the official language, my hunch is that the IMF (may be) knows or suspects that much of the new lending in China is now in non-performing loans.

Shadow banking: how big?

Nobody knows that for sure. I am only guessing here. However, we do know that, much like in the US in the period leading to the financial crash of 2008, there is an enormous amount of “shadow banking” in China. Official banking originating from the large state-owned banks goes mostly to “established” borrowers, largely state-owned corporations.

Smaller private firms largely rely on “shadow banking”. The problem is that nobody really knows how big this sector has become and what its level of exposure to bad loans may be in reality. This is pretty much the situation in the US prior to the 2008 Crash. We knew that there was an “informal” sector. We knew that there was a lot of leveraging. But nobody, and that included all banking sector regulators, knew how big this sector was and how much other financial institutions depended on it. When we found out, it was too late.

Is there a chance that China may be about to experience something similar? Who knows. But this possibility would explain why the IMF calls for urgent changes. 

 

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