James Kynge, of the FT’s China Confidential, writing in the parent newspaper at the weekend, makes grim reading for any European or American policymaker hoping that a second Beijing stimulus would be able to pull the world economy though its latest sluggishness:
The sustained haemorrhage of state bank deposits has swelled the unregulated shadow banking system to such a size that it now supplies more credit to the economy each month than the formal banks do, according to China Confidential, a research service at the Financial Times. This means that Beijing, which has wielded financial control as a key tool of Communist party power, now finds itself largely at the mercy of an unregulated collection of trust companies, private banks, kerb lenders and loan sharks.
Even allowing that China’s trust banks, the largest part of the shadow banking system, are registered businesses and in hock to the big state owned banks — although that is a double-edged sword; which is tail and which is dog? — and there is some local-official sway over some local underground lenders, central economic policymakers are unlikely in the new circumstances in which then find themselves to be able to replicate the instant growth they stimulated with cheap state-driven credit in 2009.
A larger concern is that even if policymakers wanted to use the large state-owned banks to deploy Stimulus Two, the banks are in no shape bank to put it into effect. Beijing has already moved to shore up the big banks’ balance sheets. Central Huijin, the domestic arm of the country’s sovereign wealth fund, started buying shares in the country’s four largest banks on Monday to “support [their] healthy operations” and “stabilise the share prices”.
Central Huijin is already the majority shareholder in the Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China. Investors have been increasingly jittery about the balance-sheet strength of the big state-owned banks, fearing they are carrying potentially too much bad debt from the loans made since 2008 in the cause of Stimulus One.