That’s a big (click to enlarge) chart from Moody’s on how they define “shadow banking” in China, via a Q&A comment on the growth of the sector. Read more
The China Banking Regulatory Commission last week issued several strict-sounding new rules applying to the issuance of Wealth Management Products. The investment products have seen massive growth in the past year, with assets tripling to RMB10tn in the past two years, equivalent to 10 per cent of all China’s bank deposits.
Apart from upsetting share prices of mainland Chinese banks, what are the new rules actually going to achieve — if anything? Read more
China’s National People’s Congress annual plenary began today, with soon-to-be-former premier Wen Jiabao outlining the official economic targets for 2013. We’ve written a few posts lately about how China’s growth has become increasingly driven linked to credit and, particularly, fast-growing shadow finance. More recently, there are signs the authorities are feeling less comfortable with letting shadow finance run riot — but at the same time, its role in fuelling growth makes a big or sudden curtailment look unlikely.
The targets announced today added to signs of discomfort with unchecked credit growth, according to various China watchers. Read more
First, a reminder of the degree to which China’s growth has been increasingly fuelled by credit over the past few years:
The chart above doesn’t quite show it, but non-bank credit growth outpaced bank loans last year. The rise of China’s shadow banking scene has happened very rapidly — much of the growth only happened since 2009. Read more
FT Alphaville spent part of the weekend at a conference on shadow banking organised by the City Political Economy Research Centre. Though, as it turns out, much of the message was: be not afraid of shadow banking, some classifications are born, some are achieved and others have a name that sticks but is very much disliked thrust upon them. Read more
Further dispatches from the Danish Institute for International Studies’ conference in Copenhagen on “Central Banking at a crossroads”.
Today we focus on the new age of collateral-based finance and the presentation given by Manmohan Singh (speaking in an independent capacity rather than as a representative of the IMF). Read more
Friday’s announcement of new daily liquidity operations by the Peoples’ Bank of China has prompted a lot of speculation about what it means for monetary policy in China. The PBoC has historically set rates via tools such as reserve requirement ratios, and prescribing loan and deposit interest rates.*
Societe Generale’s economists believe this is a step towards interest rate liberalisation, and that the PBoC will increasingly use its liquidity operations and repo rates to guide policy rates, rather than prescribed RRR and deposit and lending rates. Read more
This post is not about another Chinese shadow financing innovation, or the possible or actual blowing up of said innovative products. Nope. Something even worse…
Although the new Chinese leadership seems so far unenthused about major reforms, a few strategists have detected signs in the past couple of weeks that the country’s authorities are preparing to crack down, somehow, on shadow financing. Read more
A somewhat familiar tale of investors who thought their money was safe as a deposit in a state-backed bank… and a curious regulatory response. Read more
A proposal by the Securities and Exchange Commission chairman Mary Schapiro to more closely regulate money market funds was abandoned back in September when three of the five commissioners opposed it. A week or so later it became clear that the Financial Stability Oversight Committee would keep advancing the cause of the MMF reforms. Read more
Read enough books and economics papers about the recent US financial crisis, and at some point you might notice something odd.
Most of them are about the factors that made the crisis and subsequent recession so profound and enduring — excess leverage, deregulation, lax lending standards, the rise of securitisation, blindness of the rating agencies, fraudulent bankers — but very few of them are about what actually started the crisis. Read more
There’s some interesting detail in the September loan data published over the weekend by the People’s Bank of China.
As we wrote yesterday, Michael Werner from Bernstein noted the role of big changes in the amount of ‘discounted bills’, a type of short term financing product, on total lending numbers. In short, the growth in these bills has been responsible for much of the growth in year-to-date lending. If you look at the far right column, the amount of medium- and long-term lending is quite meagre once the bills are removed: Read more
We wrote last week that China’s shadow banking system was reflecting and, to an extent, contributing to a growing liquidity risk which in turn is being exacerbated by net capital outflows. Since then, there have been some interesting revelations on the domestic liquidity management, especially in shadow banking, and especially especially in wealth management products.
To recap, wealth management products or WMPs are a little like a term deposit, only they offer Chinese investors a more appealing rate of return than a normal bank deposit (which will deliver a negative real return) and it can be backed by assets — effectively, an informal securitisation. Read more
Here are some charts we knocked up (in our usual MS paint, so excuse the pixelation) to try and explain why the banking system’s biggest problem may lie in ‘negative carry’ — a phenomenon that would make investment-focused lending unprofitable, pushing the onus instead on pariah-profits extracted from economically destructive practices.
We begin with the following (click to expand): Read more
The US shadow banking appears to have halved since the start of the 2008, at least according to one new estimate — which also reminded us that we still have to come up with a better way to define this very broad sector.
This is from a Deloitte report out on Tuesday (click charts to enlarge): Read more
FT Alphaville decided earlier this week that we are sick of the term “shadow banking”. We’ve failed to come up with an alternative, however, and in the meantime Edward Kane, a professor at Boston College, has presented a paper entitled “The inevitability of shadowy banking” at the Atlanta Fed-hosted financial markets conference.
Kane’s paper says shadowy banking is basically safety-net arbitrage. He defines it thus: Read more
Just when you thought no more could be written about collateral, shadow banking and repo, Manmohan Singh and Peter Stella come together to bring us a new paper on the core essence of money and collateral.
The story so far: the world has been plagued by a shortage of safe collateral and an over-dependence on shadow-bank funding, all of which has led to a breakdown in repo markets and secured funding, which is having more of an effect on financial markets than many first anticipated. Read more
Deposit insurance on non-interest bearing accounts — it was in October 2008 that the FDIC started it, through the Transaction Account Guarantee, or TAG.
Until we looked a bit more closely, we hadn’t guessed that the issue could offer much insight into the complexities of shadow banking regulation. Read more
A list of shadow-banking entities, as defined by the European Commssion in its latest green paper on shadow banking:
“Shadow banking” must be dragged into the harsh light of day and both it and global banks must be forced to serve the real economy, the new chief of the Financial Stability Board has warned. Mark Carney, who also serves as governor of the Bank of Canada, told the FT that bankers must stop trying to delay or water down the reforms so they can return to “business as usual”. He said shadow banking market-based sources of credit, which include corporate bond sales and direct lending by hedge funds, are now half the size of the traditional banking sector and growing still, even as many banks scale back their lending. Read more
China’s inflation rate fell in September, which is what pretty much everyone wanted.
Only a small decline though — to 6.1 per cent from 6.2 per cent in August. The food price inflation rate remained the same at 13.4 per cent. So, the strategists say Friday’s figures won’t be enough to prompt any monetary easing. That brings us to Chinese banks’ bad debts… Read more
Yale University’s Gary Gorton and Guillermo Ordoñez have a new working paper out on the role of collateral in financial crises. This may not pass for exciting news in some places but FT Alphaville is not like other places. Gorton is renowned for his work on shadow banking and wrote an excellent short primer on the recent crisis.
(Update: He’s also, as our commenters point out, the man behind some of the AIG’s risk-management models. Take that as you will, we still think there are some interesting insights in the paper.) Read more
… into a hole, that is.
So, China’s Golden Week was not as great for property sales as it usually is. Sales were down 32 per cent on the previous year in 20 major cities, Bloomberg tells us. Which has prompted a big fall for some property developers and financials, dragging down the Shanghai Composite and Hang Seng. Read more
Earlier in the week, Société Générale’s economist Wei Yao had a striking note about China’s shadow banking problem (h/t Also Sprach Analyst), which she and her team estimated to be worth Rmb14,000bn – 15,000bn:
Here’s a chart for anyone interested in the origins of the so-called deposit crisis:
From the annals of financial repression, we bring you Libor rates.
It’s a torrid tale of QE2, dollar funding and liquidity — and it’s one we thought we’d mention, given that the Federal Reserve’s second bout of quantitative easing has just come to an end. Read more
FT Alphaville suggested on Wednesday that Dodd-Frank is likely to be a bigger boon to the shadow banking system than — as others have suggested — to European banks.
We’re still getting our heads around the right approach toward shadow banking (and how best to define it) but a couple of insights from recent speeches on the topic caught our attention and may be of interest. Read more
Get the little flags at the ready: on Tuesday JP Morgan Cazenove published the final installment of its trio of reports on regulatory arbitrage.
It is stirring patriotic sentiment up on Capitol Hill, with some lawmakers worried that the US’s comparative advantage will be blunted, according to Politico. Read more
For the commute home, or while wondering about Farhat Omar Bengdara’s whereabouts,
- The governor of the Libyan central bank is missing. Read more
With a tip of the hat to Simon Johnson, here’s a Harvard paper with a curious take on two hot topics of the financial future: macro-prudence and shadow banks.
Getting the first wrong might create (more) perverse incentives in the second. Read more