Rust Belt in Recession, But Banks Grow Shadow Banking
Regional banks in China’s rust belt provinces are driving the rapid expansion of shadow banking in the country, fuelling a web of informal lending that poses wider risks to the financial system, according to a study by the financial services company UBS Group.
Smaller rust belt banks like Bank of Tangshan and Baoshang Bank have been using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions, the study by analyst Jason Bedford said.
Others have been using the shadow loan instruments to diversify away from lending in their struggling home provinces, exposing themselves to a much wider spectrum of Chinese corporate risk in the event of a default, according to the report.
Nearly three years ago I posted: Liaoning Sounds Warning on Chinese Economy. In 2015, it was: China Northeast in Recession, Unadjusted Nominal GDP Declines; Global Economy on Knife’s Edge.
China has propped up its economy and the global economy with a boom in credit issuance since 2016. If the banks in the northeast are an example, all China has done is financialized its economy. Economic activity is propped up by credit and financial sector profits. Similar to what the United States did with the housing bubble. Until home prices stopped rising in 2006, the financial sector stopped growing in 2007, everybody noticed in 2008.
The key factor is the U.S. dollar. Has the dollar peaked? If there is a new global growth cycle in credit,faster GDP growth and U.S. dollar weakness (higher inflation), then China can rely on the world to bail it out. I have to respect the charts and the drop in USD this week was significant. I have to lighten my positions. But I still believe it is a headfake. I don’t see the rise in copper and industrial metals as a harbinger of a new growth wave, but the peak of a bear market rally. If I’m wrong, that is great news for China, the global economy and equities. The U.S. market is in the middle of a bull market that has 5 to 7 years to go if global growth accelerates.
If I’m right, the markets once again are ignoring the threat posed by China’s credit bubble unwinding. That threat is bigger today than yesterday. The target price for USDCNY in the event of a Chinese credit crisis keeps moving higher with the passage of time, regardless of which way the yuan moves in the short-term.