US meltdown shadow looms large over China
But observers believe Beijing could use its massive foreign reserves to save financial system if shadow banking activity spirals out of control
Parallels between the United States and China have started to look more ominous after several years of rampant credit growth and the emergence of an increasingly uncontrollable and unsustainable shadow banking system.
China's massive foreign reserves could, however, be the last tool in the bag for its bank-centric financial system if no timely regulations are implemented.
With the memory of the collapse of Lehman Brothers in 2008 still fresh, investors are fretting over the growth of thinly regulated shadow banking activity. Trusts, entrusted loans and bank acceptance bills shot up sharply to a record 294 billion yuan (HK$370 billion) last month.
A key risk is the growth in shadow banking and the role of SOEs and local governments
According to Moody's Analytics, China's core shadow banking products, which are often opaque and subject to little or no regulation, almost doubled to 20.5 trillion yuan last year from 11.7 trillion yuan in 2010. The US firm excludes entrusted loans and trust loans as they own underlying assets.
Late last year, a wealth management product (WMP) sold by a Shanghai branch of Huaxia Bank caused a stir when dozens of investors were informed that Zhongding Wealth Investment Centre, the borrower, would default on repayment.
The scandal prompted the banking regulator to increase its scrutiny of WMPs and order banks to refrain from issuing similar products.
"A key systemic risk is the growth in shadow banking and the role of state-owned enterprises [SOEs] and local governments," Andrew Sheng, the former chairman of Hong Kong's Securities and Futures Commission, told the South China Morning Post.
He said an important first step to address this was the recent move to identify the debt of all government agencies, including SOEs and local governments, paving the way for cleaning up core shadow banking products, the issuers of which take deposits and put the money in risky but low-yielding investments.