How China Is Keeping Its Financial System From Collapsing, In One Chart

Overnight, Bloomberg has posted the latest article in a long-running series of warnings about the dangers of China's, now $9 trillion - and fast approaching 100% of GDP - shadow banking system, which it says is playing a "game of chicken with investors", and which boils down to the following: if there is a high profile failure of any one of the countless wealth management product, or WMPs, which comprise the vast majority of China's shadow banking system, and if the government does not bail it out - as it has threatened on several occasions to do - there may be a mass "run on the shadow bank", resulting in unknown adverse consequences for China's broader financial markets.

Indicatively, WMPs comprise the biggest category of AMPs, with assets of around 29.1 trillion yuan ($4.2 trillion) at the end of December, according to the CBRC. They’re also the products most widely viewed as risk free by Chinese savers.

That said, the stresses facing China's "risk free" shadow banks are nothing new - we first profiled their plight back in 2014 - and over the past few years, the PBOC has been actively involved in providing the much needed liquidity support to not only China's "shadow" financing vehicles, but its entire financial system.

This is what DB wrote in a April 7 report: "as we wrote in our January report “PBOC liquidity facilities: Doing whatever it takes” we believe if necessary the PBOC will provide as much liquidity is required to meet the goals of the Chinese leadership, even if this involves a degree of “Moral hazard”.

And visually, this is how China's central bank has quietly engaged in the biggest bank bailout of the past two years, with virtually no discussion in the mainstream press.

Is it time to panic, then? On one hand, no. As DB writes, "the rapid expansion of the PBOC domestic balance sheet that we have seen over the past 12-18 month is we think of particular note. We continue to believe that the chance of an uncontrollable domestic liquidity event remains remote unless we see a major policy mistake."

However, in a subsequent post we will lay out the DB case for why while not imminent, the time to be increasingly worried about China's market is fast approaching.