Understanding the basics to shadow banking
As discussed, with limited access to traditional financing sources like equity markets and banks, Chinese companies turned to alternative finance sources. These channels are now collectively referred to as “shadow banking.”
Let’s analyze what channels are included in shadow banking and why it’s important to the Chinese economy.
Your guide to shadow banking
As per a report from RBC, shadow banking in China includes a variety of players and actions such as the trust sector, off-balance-sheet lending by commercial banks, financing commercial bank vehicles, informal lending between two discrete parties, innovative wealth management products from wealth management firms, and also other channels.
The chart above shows the various shadow banking components.
Over the past few years, a large part of credit growth in China has come from this shadow banking. This is also partially because of the tightening by commercial banks, which has slowed down the credit growth in the normal banking channel.
As per estimates, the size of shadow banking exceeds $3.2 trillion in China. This forms a significant part of total outstanding credit in the Chinese economy.
Shadow banking’s implications
Shadow banking has helped save the day for a lot of Chinese companies looking for capital. This has helped them tide over the credit crunch. Any crackdown from the Chinese government can be a spoiler for companies that rely on shadow banking.
Recently, there have been shadow banking concerns in China because analysts see it as another bubble in the making. You’ve seen that one of the principal reasons behind the global financial crisis was the structured finance instruments. Some analysts believe that the shadow banking system could be the “Lehman moment” for China.
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