Wednesday, December 14, 2011

Nice Overview Article on the Unfolding Banking Crisis in China

China: Banking crisis looms from
The last period has seen a phenomenal expansion of the shadow banking system, in which many state-owned companies and local governments are active players. Part of the shadow banking system is comprised of private ‘underground’ banks and trusts that charge usurious rates of interest mainly from privately owned small and medium enterprises (SMEs).

These illegal financial institutions have grown rapidly, exploiting the government squeeze on the state banks. According to the central bank, underground banks hold around 2.6 trillion yuan (US$410bn) in loans, but this is likely an underestimate. They attract investments from other capitalists and from wealthy government officials (who also provide protection), drawn by the high returns from interest rates of up to 100 percent. Xinhua quoted the owner of an 800-million yuan illegal bank, who said that 80 percent of her depositors were local government officials.

Chart showing China GDP per person and Components of Government Debt as a % of GDP

It's long and broad and I recommend reading it all if you are new to the issue of China's financial situation.

The broken image for the chart of Chinese M2 versus U.S. M2 can be seen here

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