Chinese credit bubble takes a break

One factor was easily noticeable in the Chinese economic data: there was a noticeable reduction when it comes to expansion of total credit. This credit reversal took the bod yields in China to seven year lows. Investors hoped that the central banl will relax its monetary policy even more. China’s central bank, People’s Bank of China, has used many measures so that lending will rise. These include making changes to the reserve ratio needs which allow banks to lower the cushion that exists between cash and loans.

However, even with the decrease in the percentage terms ( it is not negative by any means), the corporate credit growth remains excessive. According to Neil MacKinnon of London headquartered VTB Capital, the corporate domestic debt is estimated by International Monetary Fund (IMF) to attain 127 percent of the total GDP in 2016. In 2020, the debt will cross 140 percent. Concerns about the market have been noted by the government concerning a credit bubble. The latest stock of the outstanding credit had indicated a reduction of year-on-year growth to be be a little under 11 percent.

In a note to his clients, MacKinnon said that the authorities have opted for fiscal expansion and not fresh monetary easing. This can easily initiate a credit expansion return which will underpin the economy. The IMF has warned investors about the “shadow banking” market in China. This comprises products of provincial wealth management expressly designed to invest only in companies that have their physical locations in the province itself. These include companies which bring zero returns on investment. 

The “shadow” credit products come in the category of investment instruments, which, principally with credit or loans are listed as the underlying assets and are structured by securities companies or a trust or the asset management subsidiaries. Volumes of such products went up by 48 percent in 2015 to reach 40 trillion yuan. As per VTB Capital, this equals to 58 percent of the total GDP.

Banks in China held 15.2 trilion yuan of the shadow banking products in end 2015. This is equal to eight percent of the bank assets and about 92 percent of the capital buffers. The wealth management products that can be classified as short term investments carrying higher risks and returns compared to savings deposits now comprise about 17 percent of total bank deposits. The bank lending to such financial institutions which originate and manage such products is up by 55 percent compared to 2015.

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