IMF: China’s Shady Shadow Banking System Hits $2.9 Trillion

I have a good friend of mine who works in this shadow credit industry. Essentially, they lend large sums of money to people or corporations with poor creditworthiness. The people they lend to need the money to stay in business or to make investments. Because the capital markets are closed to them, just like ordinary folks using their 38% credit card at the mall, they accept very high yields and nervous terms in order to get access.

My friend started this business in 2008 after the world blew up. It was an easier environment for him then. The crazy part about this IMF research note, speaking to China’s insanely large shadow banking system, is that it comes at a time when things are supposed to be dreamy.

Make no mistake, this isn’t a positive note when discussing China’s credit situation, especially when taking into consideration their growing NPL problem.

International Monetary Fund staff said that 19 trillion yuan ($2.9 trillion) of Chinese “shadow” credit products are high-risk compared with corporate loans and highlighted the danger that defaults could lead to liquidity shocks.

The investment products are structured by the likes of trust and securities companies and based on equities or on debt — typically loans — that isn’t traded, staff members John Caparusso and Kai Yan said in a report released Friday.

The commentary highlighted the potential for risks bigger to the nation’s financial stability than from companies’ loan defaults. While loan losses can be realized gradually, defaults on the shadow products could trigger risk aversion that’s harder to manage, the report said.

The “high-risk” products offer yields of 11 percent to 14 percent, compared with 6 percent on loans and 3 percent to 4 percent on bonds, the commentary said. The lowest-quality of these products are based on “nonstandard credit assets,” typically loans, it said.

In a separate document in a bundle released by the IMF, the Chinese banking regulator was cited as saying that banks’ exposures to “nonstandard credit assets” were a key concern, with moves already made to require higher provisioning against such exposures than for regular loans.