Monday, October 7, 2013
China's Shadow Banking In The Spotlight Again
HONG KONG (NQN)--With China's National Audit Office set to release the results of its audits of municipal governments this month, the country's shadow banking system may soon become a hot topic for market players once more.
Municipal governments often rely on funds procured through shadow banking -- transactions involving individuals and nonbank companies intended to skirt strict regulations imposed on banks -- and their debts reportedly account for nearly 40% of China's gross domestic product.
The market was thrown into chaos in June after the People's Bank of China tightened the supply of short-term funds to warn financial institutions against taking part in shadow banking. In July, the National Audit Office began across-the-board audits on municipal governments, seen as the root of the problem, for the first time in about two years.
According to a report released two years ago, debts owed by municipal governments stood at 10.7 trillion yuan at the end of 2010. A media report released at the end of September said recent debts nearly doubled that figure to 20 trillion yuan. That would be roughly 39% of China's GDP, up from 27% at the end of 2010 for a rise of 12 percentage points. According to a report released Oct. 2 by Standard Chartered Bank, municipal governments have debts totaling 21.9-24.4 trillion yuan.
Nikkei Inc. and Nikkei Quick News Inc. asked 13 economists in charge of China operations how serious they think the shadow banking issue is on a 5-point scale. The survey showed that eight out of the 13 economists picked the middle grade of 3, saying shadow banking could harm China's real economy but that it is possible for the government to address the issue.
Qiao Hong at Morgan Stanley said the risks caused by shadow banking were now manageable because of tighter regulations. Daniel So at Sun Hung Kai Financial said the government can bail out financial institutions if it is necessary because of its massive funds. But concerns are also lingering, with Chris Leung at DBS Bank saying the scope of the risk has not been confirmed because there is not enough information available.
Zhiwei Zhang at Nomura International (Hong Kong) Ltd. said 35% of China's local government financing vehicles saw their operating cash flow fall into negative territory in 2012, up from the 24% recorded in 2011. Many such investment firms under municipal governments try to make up for their losses with subsidies from local governments or by selling property.
Many market participants are of the opinion that the central government has begun to launch comprehensive fiscal reforms for local governments. Nomura's Zhang forecast that the central bank, which emphasizes fiscal discipline, will approve defaults at some local government financing vehicles next year.
--Translated from an article by NQN staff writer Hisatsugu Nagao
(Nikkei Quick News, Oct. 3)