China is one step away from serious problems.
The world's second-largest economy is struggling with growing financial difficulties, which means big trouble for the country's nearly $3 trillion shadow banking industry.
Chinese households are spending less, factory production is falling and businesses are investing more slowly than last year. Youth unemployment has skyrocketed so much that Beijing has decided to stop publishing data. Meanwhile, the real estate market is in free fall, housing prices are falling, and some major developers have defaulted.
What's going on: Shadow banks or trust firms, which mostly operate outside of the formal banking system, are a hugely important financial sector in China. These institutions facilitate the movement of funds from investors in infrastructure, real estate and other areas of the economy.
China's government-backed banks have long maintained notoriously low interest rates on bank deposits, allowing these trusts, which often pay rates of 6% to 8%, to lure investors with promises of higher returns. For many years, they have enjoyed a reputation as reliable investment vehicles, protected from capital loss. But now China's economic woes have bankrupted some trusts and saddled others with the risk of huge financial losses, leaving billions of dollars at the mercy of a collapsing economy.
The rising risk has heightened fears that a wider financial crisis is looming.
Recent developments have been less than encouraging, with some trusts already falling, according to Chinese state media. Others are balancing on the edge. One of the country's largest trusts, which managed about $87 billion in corporate and wealthy funds as of the end of 2022, missed payments to clients in August.
Experts are concerned that the fall of these trusts could potentially cause a domino effect throughout the global economy. This is because shadow banks are not just a Chinese problem.
“Organizations of this type exist all over the world, especially in Europe. What is happening in China is creating a resonant risk and the risk of contagion.” The US also has its share of shadow bankers, according to the IMF.
The main problem is whether Western institutions have given loans to shadow banks and now they are vulnerable. "It could create problems and affect the economy as a whole or the stock market as a whole."
What could happen next: The threat is so serious that investors could unite and call on the Chinese government to act to push regulators to curb the runaway shadow banking sector.
So far, “we have seen defaults where the Chinese government has not intervened. The lack of intervention led to a wave of protests from angry investors and increased police presence outside the trust companies' offices. The protests may indicate that the trust's problems run deeper than previously thought.
“The really interesting question is whether they will expand and whether the government will intervene. It doesn't really matter if it's a real bank or a shadow bank, it's still money that is effectively evaporating out of the economy, and it certainly can't tolerate a lot of extra money disappearing through the shadow bank vaults."
In August, global stocks fell 3%, mainly due to Chinese fears.
Source: CNN
Chinese households are spending less, factory production is falling and businesses are investing more slowly than last year. Youth unemployment has skyrocketed so much that Beijing has decided to stop publishing data. Meanwhile, the real estate market is in free fall, housing prices are falling, and some major developers have defaulted.
What's going on: Shadow banks or trust firms, which mostly operate outside of the formal banking system, are a hugely important financial sector in China. These institutions facilitate the movement of funds from investors in infrastructure, real estate and other areas of the economy.
China's government-backed banks have long maintained notoriously low interest rates on bank deposits, allowing these trusts, which often pay rates of 6% to 8%, to lure investors with promises of higher returns. For many years, they have enjoyed a reputation as reliable investment vehicles, protected from capital loss. But now China's economic woes have bankrupted some trusts and saddled others with the risk of huge financial losses, leaving billions of dollars at the mercy of a collapsing economy.
The rising risk has heightened fears that a wider financial crisis is looming.
Recent developments have been less than encouraging, with some trusts already falling, according to Chinese state media. Others are balancing on the edge. One of the country's largest trusts, which managed about $87 billion in corporate and wealthy funds as of the end of 2022, missed payments to clients in August.
Experts are concerned that the fall of these trusts could potentially cause a domino effect throughout the global economy. This is because shadow banks are not just a Chinese problem.
“Organizations of this type exist all over the world, especially in Europe. What is happening in China is creating a resonant risk and the risk of contagion.” The US also has its share of shadow bankers, according to the IMF.
The main problem is whether Western institutions have given loans to shadow banks and now they are vulnerable. "It could create problems and affect the economy as a whole or the stock market as a whole."
What could happen next: The threat is so serious that investors could unite and call on the Chinese government to act to push regulators to curb the runaway shadow banking sector.
So far, “we have seen defaults where the Chinese government has not intervened. The lack of intervention led to a wave of protests from angry investors and increased police presence outside the trust companies' offices. The protests may indicate that the trust's problems run deeper than previously thought.
“The really interesting question is whether they will expand and whether the government will intervene. It doesn't really matter if it's a real bank or a shadow bank, it's still money that is effectively evaporating out of the economy, and it certainly can't tolerate a lot of extra money disappearing through the shadow bank vaults."
In August, global stocks fell 3%, mainly due to Chinese fears.
Source: CNN