Could shadow banking cause an economic crisis?
Ratings specialist Fitch believes China’s shadow banking sector may be hiding risky assets worth as much as $2trn (£1.3trn) in off-balance sheet lending.
While that is a huge amount, Mr Ehrmann does not expect China’s banks to face the same problems UK banks did five years ago.
“Provisioning for non-performing loans has been high. But if you look at the figures for actual non-performing loans, the percentage is less than 1 per cent,” he says.
Richard Gao, portfolio manager at Matthews Asia, agrees that Xi Jinping’s government will not allow shadow banking to trigger a full-scale crisis.
“We believe that a widespread banking crisis seems unlikely for China,” he says, but adds that there could be further knock-on effects on the economy.
“If the interbank interest rate remains high for an extended period, it could ultimately lead to higher financing costs for businesses, harming the growth of China’s already slowing economy.”
The PBoC’s announcement that it has since provided some liquidity to support financial institutions “in prudent need” – and the subsequent fall in the Shibor rate – are therefore welcome signs.
“The relatively tight liquidity may still exist for some time, but it seems its peak may be behind us,” Mr Gao concludes.
Jessica Bown is a freelance journalist
