China's banking system is getting too big to bail out: 'too big to bail out'. 'Official' loans have more than doubled since the crisis began in 2007 and have been growing twice as fast as nominal GDP (although overall credit, as a ratio to GDP, is still lower than recorded in more advanced economic systems). But this is only part of the story. What is most worrying is the emergence of a 'shadow banking system', such as the one which, just before the great recession, had reached a size in America even greater than that of the banking system 'in the sunlight'. Many companies, and even individuals - well 'connected' politically - borrow money cheaply from state banks and then lend it, at high rates, to small businesses that are unable to obtain credit through official channels.
Both official and shadow channels then securitize these loans and sell the bonds to savers who are attracted by the high yields (keeping money in the bank pays very little, as deposit rates are kept artificially low). It seems that the conditions are being recreated for a financial bubo like the one that broke out in 2008, given that the ultimate debtors will hardly be able to obtain from the use of loans useful enough to allow them to service the debt, and these bad debts will be transmitted along the long chain that was created.
At the recent Plenum of the PCC this danger was warned and the march towards market mechanisms began, first of all that of liberalizing rates on deposits. Meanwhile, the central bank is learning, sometimes awkwardly (see the money market crashes of June and this December, which sent short-term rates soaring) to regulate liquidity. The message that is transmitted to banks, both in the light and in the shadows, is only one: deleveraging for them too, before bad debts become unmanageable.
http://www.theage.com.au/business/world-business/china-tries-to-deal-with-its-mountain-of-debt-20131229-301lk.html
