Table of Contents

European Integration in a Global Economy

European Integration in a Global Economy

CESEE and the Impact of China and Russia

Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald

The expert contributors focus on global imbalances and accompanying policy challenges, competitiveness and trade, the sustainability of current growth strategies, and banking and financial stability in the light of the global economic and financial crisis. They provide a multi-disciplinary assessment, combining the views of high-ranking central bankers, policymakers, commercial bankers and academics, and demonstrate that a broad view of European economic integration is crucial given that spillovers and contagion were major issues of the recent economic crisis.

Chapter 17: China’s shadow banking sector – pillar or threat to the system?

Markus Taube

Subjects: economics and finance, international economics, money and banking

Extract

It is not long ago that the Western world was watching developments in China with a mixture of patrimonial pride – because its rapid development and growth seemed to be based on classical Western recipes of marketization and internationalization – and a peculiar fascination with calamity – because the Chinese ‘economic miracle’ seemed to be destined for ruin as its banking sector was burdened with dramatic levels of non-performing loans (NPL) (e.g. Chang, 2001). Today the situation has changed. While the triad economies are trying to stay afloat in a series of system-shattering crises, the Chinese economy is still on its trajectory of high-speed growth and development, with its banking sector having reduced its NPL ratio to a minuscule 1.1 per cent (CBRC, 2011; Bloomberg, 2011) and IMFaccredited crisis resilience (IMF, 2011). Today anxious eyes are fixed on China, seen as the final anchor of stability and the potential saviour of a faltering Western system poisoned by complex financial products; it seems to have lost the capacity to control excessive sovereign debt. But is China’s economy really as stable and strong as these hopes express? Probably not. A whole range of problems has evolved in the shadow of the country’s rapid economic rise, ready to become nuclei of serious crises once the dynamics of China’s catching-up growth break down. One of these potentially destabilizing parameters rests in China’s informal banking sector, which, unnoticed by most observers, has not only grown to very significant size, but is also standing completely beyond the reach of China’s regulators. This chapter will try to shed some light on a few aspects of this phenomenon, trying to determine the role of China’s informal financial sector for the Chinese economic system as well as its potential to destabilize the Chinese economy. In order to do so, Section 1 will first of all identify the two major spheres of shadow banking in the Chinese economy, before Section 2 focuses on the working mechanisms and specific manifestations of China’s informal shadow banking sector. Section 3 concludes with a discussion of the positive as well as negative impacts of informal shadow banking on the Chinese economy.

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