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Economic analysts warn China could be facing a future economic crisis because of "shadow banking." That's when state-owned businesses and local governments lend money to smaller businesses outside the banking system. But local governments are borrowing their own money from China's four biggest banks--leading to a domino effect that one Chinese official compared to the 2008 US subprime mortgage crisis.
Since the global financial crisis, many state owned businesses have been functioning as so called "shadow banks," lending money to small businesses. These small businesses are unable to get loans from regular banks due to the tightening of economic policy, so they take the high interest loans the "shadow banks" are offering.
In addition to state run businesses, local governments also use loans as a form of investment and have lent out trillions of Yuan to smaller Chinese businesses. But this could spell huge problems for the Chinese economy in the near future. When small businesses can't return the money they borrowed, many of them could choose to disappear, taking the money with them.
[Chaoan Jushi, Economic Commentator]:
"Under the present conditions of economic contraction, these medium and small sized businesses in China that need a lot of cash, after they have borrowed money, it is very hard for these businesses to be 60 to 100 percent profitable. To put it plainly, this is a massive risk. Especially for some businesses, their way of thinking is, 'if I can borrow money to get through the difficulties then I can keep going, if I can't keep going then I'll run.'"
But the money local governments and state owned businesses are lending out is money they borrowed themselves, from China's four biggest banks. The deputy head of the standing committee of the National People's Congress warned at the World Economic Forum in Dalian last week:
"The Chinese version of the US subprime mortgage crisis is loaning money to local governments who have no way to repay it."
Economics professor at City University of New York, Chen Zhifei says this is nothing new, but could now be reaching the point where it threatens China's entire economic system.
[Chen Zhifei, Economic Commentator]:
"This kind of distribution of funds is a national policy in China. It has already existed for up to 20 years, especially after the financial crisis started there was four trillion Yuan worth of investment. If their returns do not equal their investments, I think this crisis could cause many banks to be faced with bad debt, and thus there is a danger of the entire national economic system collapsing in this way."
Beijing based economist Mao Yushi says this phenomenon has come about because of officials' laziness and abuse of power.
[Mao Yushi, Beijing-based Economist]:
"The businesses borrowed money from banks and then in turn gave out high interest loans, the issue is, because the interest rate isn't the market rate. These are lazy officials, as they have power they can borrow money, ordinary people can't, they can only borrow at high interest rates, this is the issue."
As Chinese authorities tighten economic policy to fight inflation, loans are harder to come by and small businesses are more likely to resort to "shadow banks." Much of the money borrowed from them will soon be due for repayment, and could spell a murky road ahead for the Chinese economy.
BEN HEDGES
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Cash Dash from China's Banks to Private Lending Marketby NTDTV1,132 views
CCP officials at work here. They are going to cause big time problem.
redwhitedude 2 months ago
@1eyednewt ah cmon, do t make jews a master race, it s wrong like making them sub race
udical 5 months ago
911 was a controlled demolition to get into a war and now is being used to take your Rights away from yous
marvelstryfe 5 months ago
Welcome to 2008
sciflyer67 5 months ago