Exposing China's Shadow Banking System

Tyler Durden's picture

We have in the past attempted to take on the gargantuan task of exposing the multi-trillion Chinese Shadow Banking system (not to be confused with its deposit-free, rehypothecation-full Western equivalent), most recently here. Alas, it is has consistently proven to be virtually impossible to coherently explain something as decentralized and as pervasive as an entire country's underground economy, especially when the country in question is the riddle, wrapped in a mystery, inside an enigma known as China. Today, however, courtesy of AsiaFinanceNews we get a report as close as possible to the most comprehensive overview of what may soon be (especially if rumors of tumbling Chinese municipal dominoes are correct) the most talked about subject in the financial world: China's Shadow Banking empire.

From Chinese Shadow Banking System

China presently has five state-controlled megabanks operating within the supervision of the central government, of which the government is a majority shareholder, and seventeen additional “shareholder banks.” Because China’s state banking sector operates as a direct subsidyfunding channel for state-owned enterprises (as opposed to acting in the capacity of risk analytics based credit institutions), the largest state-owned banks have required periodic recapitalization every decade over the past sixty years as the constant generation and cumulative exposure to non-performing loans exceeds the banks’ total equity. The circumstances comprising the present situation, however, will include monetary exposure by international asset management firms which have acquired both direct equity-stakes in the banks as well as exposure to Hong Kong-listed shares.


State Control and Politically Mandated Loans


The banking system is generally considered to represent the weakest link in China’s political economy. Loans are typically a form of direct subsidy by the central government to the various state-owned enterprises. According to Victor Shih, a professor at Northwestern University who specializes in China’s political economy and is considered an expert on China’s banking system, prior to 1997 there had been no comprehensive audits, nor general ledgers, nor any capital stock at any of the five largest banks, as such was considered unnecessary. The central government, which controls 98% of China’s financial sector, maintains control over the banks in order to finance various political and socio-economic policy objectives, maintain capital controls and set fixed interest rates, comprising in effect a self-referential sector,  resulting in inefficient capital allocation which deprives China’s small and medium-sized enterprises (“SMEs”) of access to credit through the supervised banking system


Rejection of Western Credit Practices: Global Financial Crisis Doomed Reforms


The government halted and subsequently reversed reforms, and began moving away from western banking practices in late 2008 in response to the global credit crisis, ordering banks to originate loans to both local and centrally-planned investment projects in order to prevent a rapid slowdown in growth. The credit expansion undertaken by banks in 2009 at the direction of Chinese president Hu Jintao resulted in approximately $3.1 trillion in new loans created by the end of 2010.5 The National Development and Reform Commission (“NDRC”) fast-tracked and granted approval of virtually 100% of all fixed-asset investment projects submitted for funding by local governments. The NDRC was created to address the response to a survey by the central government asking local government officials to identify those projects for they had been unable to obtain credit financing. The role of the NDRC is to approve the projects rejected by the banks, thus in essence having approved the worst projects for financing in 2009 and continuing to approve such projects through the present

Read on below (full pdf):


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zorba THE GREEK's picture

We have our own shadow banking that needs exposing. The only difference between

China's state run banks and those in the U.S. is semantics.

Stackers's picture

What I wonder about is the rate of non-performing loans in the unregulated person to person loan market. The Chinese borrow a lot of money through black market person to person system

markmotive's picture

You see the same system in India. Also in America, pre-2008.

Problem with China is not the source of the loans but the sheer volume of the loans. Demographically, China today looks like Japan did in 1990. And we all know what happened to Japan over the past 22 years.


DoChenRollingBearing's picture

Wow.  China does indeed have gargantuan problems, but we apparenlty knew that.  Demographically, environmentally and in the past year: BIG TIME financial problems.

Author Kopin Tan ("Asian Trader") at Barron's says LOTS of people are gloomy on China as well.

The Cover Story is on Goldman Sachs...  "Review of Barron's -- Dated 1 October 2012"


G-R-U-N-T's picture


If you can carve away some time, I suggest you examine this website videos about what's happening in terms of the UN Agenda 21: http://www.democratsagainstunagenda21.com/videos.html and its infection which has literally spread to every city, county, region, and State in the U.S. and globally.

I heard an interview last night on Coast to Coast AM:http://www.coasttocoastam.com/  about what this agenda represents and the strategy for its implementation which has been ongoing for some time. Figured both you and the ZH community could become informed.

"UN Agenda 21/Sustainable Development is implemented worldwide to inventory and control all land, all water, all minerals, all plants, all animals, all construction, all means of production, all information, and all human beings in the world.   INVENTORY AND CONTROL."


What do you think?







SelfGov's picture

It seems to me the US looks like Russia did in 1990.

DosZap's picture

What I wonder about is the rate of non-performing loans in the unregulated person to person loan market. The Chinese borrow a lot of money through black market person to person system

Dunno,but with 360 million Chinese living on $2.00 per day, and the crap strom brewing there, it should be interesting.

prains's picture

the race to the bottom gets more interesting by the day

SafelyGraze's picture

"the race to the bottom gets more interesting by the day"

after you get there though, it starts to be kinda boring

Peachfuzz's picture

ohh an angry drunk then? Have ya tried switchin flavors?

JR's picture

Yes, quite true and, unfortunately, the US banking system has been a catalyst for crimes of empire now playing full screen in the Middle East.

The voices of Ahmadinejad and Netanyahu were not the only major voices heard at the UN this past week. A UN side meeting heard the voice of another man of the hour; a speech that would be covered by the major media only at its peril. That man was Julian Assange of WikiLeaks speaking from his place of asylum, Ecuador’s London embassy.

The US is waging war on innocent people throughout the US and the world and Assange’s message below is a major chunk of evidence for the prosecution; Assange brings more than charges, he brings pages of evidence of US crimes against justice and natual law.

Like all tyrants, the US government makes a mistake when it begins to turn the screws. When the tyrant encounters a man of courage it backfires on the tyrant. If the Obama Administration should happen to order the assassination of Assange, it will be incredibly sorry –  for there will be a worldwide backlash against the US.

Assange, Enemy of the State, Addresses the UN | Antiwar.com

John Glaser, September 27, 2012

In the news section today, it has been revealed through declassified documents that WikiLeaks Julian Assange has been designated an enemy of the state by the US military, a legal classification also assigned to al-Qaeda and which could allow Washington to kill or detain Assange without trial.

Via Democracy Now, Assange spoke “via videolink from the Ecuadorean embassy in London” and “addressed a side meeting of the UN General Assembly on Wednesday evening.”


Whiner's picture

Is Assange "a military personnel" type guy? No? Then why suggest our good old faithful military would kill him? The CIA ops would be a better speculation for your Clancey scare message. "What is said in secret shall be shouted from the roof tops." love to read the leaks, except those that get folks killed. Stop the massive dumps, turkeys.

ebworthen's picture

So we supposedly value freedom of speech but label a guy who may have never fired a gun in his life a "terrorist"?

If you don't want your secrets exposed don't do things that need to be kept secret.

How can you fight for freedom without being honest and transparent?

Or is there an agenda besides freedom and democracy?

Why are we in Afghanistan losing our kids again?

DosZap's picture

Why are we in Afghanistan losing our kids again?

Men,not kids, we have lost 2000 to date, for WHAT?.

slaughterer's picture

<--Slaughterer is GOD

<--Slaughterer is a sucky, drunken muppet

slaughterer's picture

Ha ha ha.  You guys turn on everybody, everything.  

DeadFred's picture

Rule #1 states that the banks control the government not the other way around, so"The only difference between China's state run banks and those in the U.S. is semantics" is totally reversed.

GernB's picture

I think theres a huge difference. The Fed can only create money, they have a limited ability to force banks to make bad loans or to force reluctant entities to borrow. I think that makes the US system far more dangerous because it has the verneer of central contol, but enough private sector decision making to thwart anything central planners attempt. When people become frightened about the economy, china can mandate comerce continue. In the US when real fear sets in and central planners actions fail miserably, its over, because it will become an uncontrollable snowball of fear and panic.

matrix2012's picture

Hhhmmm it is not a capacity owned by the Fed..... it's one belongs to the R0ckefella and R0ttenchild families... the paramount leaders of the 'Mother of Persistent Suffering' in the world.  The Sauron of this world!

Debeachesand Jerseyshores's picture

Here in America we have the Bernacka State run Bank called the Federal Reserve.

fourchan's picture

we should stick to macdonalds and they dim sum. only then will there be joy to the world.

reader2010's picture

They are likely to blame every problem and failture on Bo.  Long live the Party!

Winston Churchill's picture

They would eat Bo.

Oh wait,you didn't mean Obummer's dog.

Pretorian's picture

No worries here. Chines Government can enslave 100milion people in camps to work 4 free(overnight).  To reduce wage increases to become competitive again. Can US do the same?

Offthebeach's picture

Sadly, billions will trade sub marginal farming to work for steady food under the hum of florescent lights.
North Korea has the lock on starvation work camps but so far are unable to capitalize on it. Maybe a China/NK partnership.

Think for yourself's picture

Can the US do the same? I doubt it. Will they try? That is another question entirely...

q99x2's picture

Sum to be will then macdonalds stick to world. Only we and they should dim joy.

SafelyGraze's picture

"Sum to be will then macdonalds stick to world. Only we and they should dim joy."

but financial to people and lending lending can happiness borrowing.

after many horizon will go soda. big cup! doesn't it.

Whiner's picture

What's the "end game" for this world wide money printing? War? Default! Hyperinflation? A: All the above. Why would it all stop? The economy will always in the end be controlled by private capital which will stop buying and bet against the worthless debt when it exceeds somewhere between 100 to 250% of real GDP. What happens then? Governments collapse, currencies are written down and debts repudiated. How soon could this happen? Oh, say before the end of two years, but possibly sooner and suddenly. What can I do beyond prayer? Get stuff-commodities-you can eat, hold on to-hard assets unmortgaged, and focus on your personal security. We are beyond politics now. A farm with its own water and a mine-field or gold mine would be nice.

auric1234's picture

Collapse of the debt bubble is not the end, as it will then be soaked by the printing presss bubble, which will eventually collapse. THEN it is end of the game.

What I wonder is if common sense can reach regulators before doomsday clock does. There is still time to stop this madness...


Mine Is Bigger's picture

Maybe I'm just ignorant.  But ... If you think debt will be repudiated, wouldn't it make more sense to buy homes, farmlands, prescious metals, etc. with borrowed money, instead of paying back mortgages?  I would like to know your thought process.

A Lunatic's picture

Sanctioned debt repudiation at the consumer level will never happen.

SafelyGraze's picture

"A farm with its own water and a mine-field.."

you'll need a pair of those big sandals

BattlegroundEurope2011's picture

I can now sleep better at night now.




Stuck on Zero's picture

Clearly the Chinese over-invest and under-consume.  What the heck would happen if they decided to all move into precious metals?


kaiserhoff's picture

OK, I've traveled a bit.  I kind of understand the economies of Europe and the Americas, but everything's a moving target.

What the fuck is in all those Asian Towers???  The whole world is moving away from office space, and I know the office is the worst possible place to be.  You're a sitting duck for salesmen and charity beggars, so what the hell is going on.  WB7?, Bueller? 

Cosimo de Medici's picture

What's in all those towers? Other than broken dreams?

Steel.  Glass.  Wire.  HVAC.  Office furniture.

They had to store all the excess somewhere, so might as well make it pretty.  Would you rather look at a warehouse stuffed full of needless inventory, or a shiny skyscraper that just reeks of prosperity to foreigners doing the ten day Expert Tour?  Hugh Hendry stayed a few weeks, so he had time to see that a whole lot of these monuments to unnecessary production were empty....and decaying....and still financed

Cosimo de Medici's picture

The more I "learn" about economics, the less I understand about how the world keeps turning.  Cut away all the noise, however, and there's this question about China:  if the government encouraged the issuance of loans to the tune of 60-70% of then-GDP in one year's time, what percent of those might be expected to go bad?

All of Bernanke's printing has been the equivalent of 13% of total US GDP, and he has done his printing over four years.  Half of that is being held as excess reserves, so effectively he's only unleashed 6-7% into the economy, and again, that was over four years.  China did 60-70% of GDP in a single year.

Bernanke ain't yo Daddy, China.  You built that mess yourself.

super elite's picture

From Pages 20-21 of the PDF: "However, Fitch Ratings has estimated that based upon total credit expansion for 2011 of 38% of GDP, China’s debt-to-GDP ratio would be approximately 187%,
an increase of 61% in just three years."

The article talks about a 60% increase over 3 years, not a single year. Also see chart on page 25 of the PDF.

As far as comparing it to Bernanke's printing, he hasn't increased debt-to-GDP in the US (see Ray Dalio's Beautiful Deleveraging). Bernanke is reducing our debt-to-GDP.

glittering's picture



I wonder who taught the Chinese about "Shadow banking"/Off-balance sheet financing manipulation to get around capital reserve requirements.

gregga777's picture

A wise old Chinese proverb says:



FOOL - an investor in China or in Chinese stocks or bonds.

MONEY - Investments in China.

SOON - Much sooner rather than later.

PARTED - GONE!  Gone, gone, gone!

Whe else would so many Chinese be buying GOLD?  They know that bank deposits are worthless.

falak pema's picture

the Yuan is pegged to the greenback; the Communist party run country tolerates entrepeneurship with an iron crony hand, as its created the outsource model making China-India world factory. 

So chinese profits are tied in to US consumerista economy and to greenbacked treasuries. 

The whole world now works on the basis of the fiat financialista pump; whose unseen face is called shadow banking. Its the promised land of Oligarchy power and riches and ALSO  its cancerous undergrowth. 

The more you pump the official banking structures the more it dumps the profits into shadow banking; from there into Caymanista HF and numbered accounts; and transfers the losses to the government balance sheetss; aka the CB logs!

....How long can the show go on for is what any rational man would ask? 

....Don't ask such a stupid question in an irrational, Oligarchy run, one-party crony political world!

Is the answer the market sends him !

LMLP's picture

Tyler.....up until today I was looking to buy this dip in Chinese equities.... Fuck that.... Thankyou for this piece, the full PDF is a must read....No wonder FX, Gold and Silver is the only valid asset classesleft the rest are just bollax