China’s shadow banking sector clouds economy
China has seen warning signs in the horizon in view of the growing shadow banking sector that could have a ripple effect on the economies with a great exposure to Asia’s largest market, Fitch Ratings asserted on Wednesday in Colombo.
Although it was believed that a financial crisis was unlikely from China the current situation speaks of the unsustainable environment that has emerged over the past few years, Head Asia Pacific Financial Institutions Managing Director Mark Young said in an interview with the Business Times on the sidelines of the presentation made on “Fitch Perspectives: Asian Risks on the Rise.”
He noted that the closed system prevalent within China would be able to contain the risks involved adding that the Chinese government was able to lock a lot of liquidity.
The warning signs have emerged since a shadow banking system has now taken over at least 60 per cent of the credit in the market in China that comprises trust and wealth management activities, Mr. Young explained.
However, he dismissed possibilities of China’s bubble burst having an impact on the Sri Lankan economy describing the island nation as too small to have an impact compared with other countries like Hong Kong, Thailand, Taiwan, Korea, Australia, and Japan that have increased trade ties. Sri Lanka has investments and obtained loans from China to a larger extent since 2009 than in previous years mainly in its infrastructure development programmes.
Mr. Young observed that today there was more focus on China to rebalance and that credit had exploded outside the banking sector.
He pointed out that this segment of the market was not transparent and that banks were creating wealth management institutions resulting in higher risk elements moved from the banks to a shadow banking sector.
“We have seen problems developing in the last six months,” he noted as a result of the rise of this new sector in which a majority have invested.
Mr. Young noted that since banks were linked to the shadow banking units established it could have an impact if this sector crumbles since banks were also on the hook.
While property and construction accounts for 15 per cent of the economy there was a big concern over a slump in the market resulting in a negative impact that could have a consequence on China’s growth, he explained.