Double trouble in China

http://atimes.com/atimes/Global_Economy/GECON-01-240614.html



Double trouble in China
By Martin Hutchinson
Jun 24, '14

Eight years ago, the accountants Ernst and Young got in trouble with the Chinese authorities for estimating the bad debts in the Chinese banking system at US$911 billion. It was especially tactless in that the major Chinese banks were mostly within months of launching IPOs in the international markets. Since then, the Chinese bad-loan problem has been swept under the rug, and we have had to make do with guesses about its scale.

China's spending "stimulus" in 2009, funded by the banks rather than by the Treasury as in the West, clearly made matters much worse. Following a recent study of the Chinese shadow banking system by the Financial Times, the current scale of the problem is becoming clear, and it has serious implications both for the Chinese past we have unquestioningly admired and the future we can expect.

China's shadow banking sector has grown exponentially since the government started pulling back on the traditional banking system at the end of 2009. Since 2007, shadow banks provided more than 30 trillion yuan ($4.8 trillion) of loans. Together with the banking system, they expanded loans by 87% of Gross Domestic Product (GDP) since 2006, according to the FT.

That's more than double the expansion in US credit from 2002 to 2007, and it indicates the potential for a severe crisis. More than 10,000 "local-government financing vehicles" have been set up to circumvent local-government borrowing limits. By the end of 2013, they held more than 31% of GDP in off-budget financing. Total debt in the Chinese economy has risen from 130% of GDP in 2008 to 220% in 2013, with assets in the formal and informal banking sector increasing from $10 trillion to $25 trillion.