Home > economics, money > China’s problem of plenty

China’s problem of plenty

Someone posted an interesting comment on Simon Rabinovitch’s article about Chinese banks in the FT today, which describes a thorny problem facing mainland lenders: too much cash.

Rabinovitch sums up by saying:

There are some glimmers of hope that money in China is beginning to flow away from banks. Non-bank sources of credit, including bonds, exceeded bank loans in the second half of 2012, an important step towards a diversified financial system.

And attracts this neat retort:

Rabinovitch totally misses the point here. In a country where there is too much ‘private’ debt, and you’re coming off of three years of the world’s largest expansion of debt ever, the last thing you want is for the controls on new debt issuance to ‘flow’ away from banks. That prevents the government from full control over the expansion of credit, and allows for bad ‘WMPs’ to flourish (insuring that more malinvestment occurs and that creative destruction is not allowed to start). As noted by the head of the Bank of China, nothing more than “Ponzi schemes.”

Banks aren’t lending because there’s too many NPLs and they cannot expand their balance sheets anymore. So, the PRC government is letting ‘non-bank’ lenders continue to fuel the expansion of debt. While it may be necessary to some small extent (the country is running pretty much on empty as far as real growth), the reality is that 1/3rd of the total savings in China is now invested in these ‘non-bank’ debt instruments (or, nearly 1/2 of annual GDP). That’s not good at all, and not a source of “hope”…

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Categories: economics, money
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