China’s Next Financial Crisis: Shadow Banking

China’s Next Financial Crisis: Shadow Banking


On this episode of China Uncensored, China’s next financial crisis is lurking
in the shadows… of shadow banking. It’s like China stacked up 9 trillion dollars… on the edge of a cliff. Hi, welcome to China Uncensored. I’m Matt Gnaizda. I’m in today for Chris Chappell, who’s on vacation, possibly in the South China Sea. Today, we’re going to talk about shadow
banking. It’s like the evil twin of regular banking. Shadow banking involves lots of money, and lots of risk. And it’s tied to China’s crazy investment
boom. China’s economic boom and its reliance on shadow banking is similar in some ways to the US economic boom in 2007. Remember: A lot of great things happened in 2007. Apple released the iPhone 1. The last Harry Potter book was published… which Chris still has not read. And the US economy had its last…good…year. Because then this happened. “Stocks all around the world are
tanking because of the crisis on Wall Street.” “The stock market is now down 21%” “We have armageddon. In the fixed income markets we have armageddon.” “No, but…” “We have armageddon.” “Armageddon”—thanks Jim Cramer— happened after the failure of a single investment bank had a domino effect on the entire global financial system. Trillions of dollars were lost, and so were millions of jobs. Well, it’s been ten years since then. These guys have recovered, but these guys…not so much. But now, this same kind of boom and crash could happen in China— and for the same reason. As Bloomberg puts it, China is playing a 9 trillion dollar game
of chicken called Shadow Banking. And like a game of chicken, some investors will get out in time. But others will plunge off the cliff, bursting into a ball of flames on the rocks
below. So what is this totally legit and trustworthy sounding “shadow banking”? To put it simply, shadow banking is when banks— or companies that are not banks— lend money outside of the normal structure of bank deposits and loans. Here’s a simplified explanation. In the traditional banking system, if a business owner wants to grow his business, he goes to a bank,
and that bank loans him money. Over time, he repays that money to the bank, plus interest. Let’s say a single bank makes 100 loans. It’s pretty careful about who it loans to. But even so, some of the businesses will fail, so Chinese regulations require that the bank set aside money to cover potential losses. But shadow banking operates outside that traditional system. Let’s say 100 businesses want loans. A shadow bank packages those 100 potential
loans into what’s called a Wealth Management Product. Then it goes to investors and is like, “Hey, buy our Wealth Management Product. It has a high interest rate.” When the businesses repay, the investors will get their investment back plus a lot of interest. This is shadow banking. It can also get more complicated. Because sometimes the bank isn’t a bank, but just a regular company that packages investments. And sometimes the businesses that want to borrow money aren’t regular businesses. They might even be a local government that wants money to build a bridge or whatever. All these things can be packaged into Wealth Management Products, or other types of financial products, and then sold to investors— or sold to investment companies, which then re-package them before selling to individual investors. A lot of times, shadow bank loans get so complicated that no one understands exactly what the risk is. According to this article, “The repackaging of credit is so complex that bankers often have to resort to line drawings that look like schematic plans for a Rube Goldberg device to explain to clients what’s going on.” A Rube Goldberg device. Like when you pull a lever, that sets a wheel in motion, that knocks down some dominoes, that ends up destroying the economy. But all this shadow banking and Wealth Management whatevers are so complicated! Investors don’t want to know details! That’s why companies involved in shadow
banking put out feel-good ads like this: “Everyone holds sunshine at their hearts Everbright your life China Everbright Bank” See? Give us your money, and you’ll have sunshine in your heart! That bank, Everbright, is actually a legit commercial bank. It makes regular loans, too. But recently it’s also been selling a lot of shadow banking products to investors, because that allows Everbright to maximize profit without putting so much of its own money on the line. Basically, it sells the risk to investors. But a lot of Chinese investors don’t think risk matters that much, because the Chinese government will probably bail everyone out if things go badly. Like this investor in this Bloomberg article, who explains that the Chinese government would never let a big wealth management product
fail, because it’s just not Chinese culture. Sounds like wishful thinking, right? But the Chinese government has bailed out banks in the past. Like the $45 billion dollar bailout in 2004. So assuming they’ll do it again seems reasonable. Although if you’ve ever read the terms and
conditions on any investment product ever, you’ve seen that “past performance is no guarantee of future results.” Sure, the Chinese government may have done a small 45 billion dollar bailout in the past. But it doesn’t want to do a 9 trillion dollar
bailout now. Besides, back then, there was almost no shadow banking in China. It only started happening on a large scale after the global financial crisis ten years
ago. Authorities tried to stimulate China’s economy by having banks lend more money. But soon, demand for borrowing got so high that banks didn’t have enough money to lend
people. So banks started packaging loans and selling them to investors to get the cash. And it became such a big market, other companies that aren’t even banks got into the game. According to a 2016 report, shadow bank loans now make up 57 percent all loans in China. In other words, more than half of all lending in China now is actually done through shadow banking! And this is a big problem because shadow bank loans are usually a lot riskier than traditional loans. Once companies start packaging and repackaging, it’s easy to lose track of what the risk
actually is. It even starts to seem like a good idea, like jumping out of a plane without a parachute. The problem is, it only works if you’re you’re Keanu Reeves,
dude. Oh, and there’s another problem. Shadow banking loans don’t get recorded on banks’ balance sheets. That makes banks look healthier than they actually are— and that also increases the risk. And guess what? That’s exactly what happened in the US leading up to the 2007 crisis. Banks had been packaging and repackaging home loans, then selling and reselling the packages, and eventually even the nerds at Lehman Brothers had no idea how to calculate the risk anymore. Shadow banking in the US was the lever that set the global financial crisis in motion, and ironically, its domino effect is what led to the rise of shadow banking in China. And now Chinese authorities are getting worried about what’s coming next. In fact, “Zhou Xiaochuan, the head of China’s central
bank has openly warned that authorities need to curb financial risks that might lead to a ‘Minsky Moment’— a sudden collapse of asset prices, sparked by debt or currency pressures, after a long period of growth.” Basically, bad debt in shadow banking could end up wrecking the Chinese economy. And if the Chinese economy gets wrecked, it could lead to serious consequences for the Chinese Communist Party. You know, because no one believes in that communism stuff anymore, so they tell people to go make money and don’t talk about politics. But if people start losing their money on a massive scale, people might start talking about politics
again— like who’s to blame. That’s why, at a top level conference in
July, Xi Jinping declared that financial security was vital to national security. “National security” is of course code
for the CCP securing its power over the nation. But it’s not 2007 anymore. It’s 2018. We have iPhone 10s, Johnny Depp is a Harry Potter villain, and Chinese shadow banking has swelled to more than $9 trillion. The Chinese government can’t afford to bail everyone out when things go south. They’re trying to rein in shadow banking. But once you let the tiger out of the cage, well, it… I guess it runs around and eats people. So what do you think of China’s shadow banking? Leave your comments below. Once again I’m Matt Gnaizda. Now it’s time for that thing we do at the
end. You’re still here? Good. Don’t worry, I haven’t taken over China Uncensored. Chris will be back soon. In the meantime, if you like this show, we hope you can click on this orange button and support us by pledging a dollar or more per episode. We’ll invest it in a Chinese wealth management product. Click to go to our fundraising website Patreon.

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About the Author: Maximilian Kuhn

100 Comments

  1. Funny, I was in China in 2017 and met a bunch of guys who owns these shadow banks. They're all US educated. This is not going to end well for Emperor Pooh Xi.

  2. Communist china down for its own good to have a chance to be democratic nation and down for the fairness of the whole democratic nations.

  3. Communist china down for its own good to have a chance to become democratic nation and down for the fairness of the whole democratic nations. Cannot allow communist china to continue its evil strategies especially investment that come with it the dictatorship control of the people.

  4. Please do more videos that go deep into topics such as this video. Specifically, go deep into topics like Ben Shapiro vs. Tucker Carlson who is more superficial. This video has 163K views, one of your highest. Keep up the great work.

  5. Theoretically, China can bail out all bad loans by printing more Chinese currency renminbi because all loans are in that currency.
    The BAD news is that printing more renminbi will bring down its value. China's foreign currency reserve is dwindling. No countries are paying back those stupid loans from China. So a bad crash of the Chinese currency is inevitable.
    The crush will send China back to where it was 10 ~ 20 years ago, i.e. among the world's poorest countries. Chinese people will have to work like slaves just to make living.
    The bad CCP government, poor people, and another recurring sad story for the Chinese.

  6. Good warning for Asian countries where Alibaba and others are sniffing entry into money market to rob them in future.

  7. Communist Countries are always on the brink of an uprising.. If he makes the common People go back to the rice fields. and Xi Xping will get whacked , that's why he has to start a WAR, to distract his little commie people.

  8. These WMPs by the way they sound are like a titanic version of MBS's that nearly collapsed the financial world last time.

  9. China has to move smartly against US dominance by re-approaching all its neighbours if really want to cut US into size as first step. Flood the entire USD as invesent against barter system. Isoloate USD. Ban business with Saudi and US friends.

    Then watch out results.

  10. Shadow banking is off balance sheet, sort of not reported. So how did the number of $9 trillion come about? How do you calculate the number which is not reported?

  11. MESSAGE TO ANY CHINESE CCP PROPAGANDIST THAT TROLLS THE INTERNET AND CLAIMS THAT ONE IS "STUPID" FOR RECOGNIZING CHINA AS A GRAVE THREAT TO THE WORLD: "You are ignorant yourself, and, call others that in projection, as you assume so much without knowing the prerequisite data points that need to be known if you are to come to a conclusion. You utilize non – sequitur logic, the basis of socialistic propaganda. Guess what? I don't own an iPhone, and I never have! I don't have the need for anything more than a cell phone and home desktop. Incidentally, there are MILLIONS of americans like me that are not dependent in any fashion on any new electronics, esp., smart phones. We read maps, and books, and, play musical instruments, and, train with weapons from sticks to pistols to long guns, bitch. Not all americans live in the city and are slaves to leftist propaganda and mercantilism. Out in the suburbs and country in america, more than half of our population is far different from what you have been told, comrade. And, guess what? TRUMP IS NOT GOING TO TARIFF iPHONES, bitch! LOL!!! And, in the USA, we are sick of chines shit that lasts only 5 years, and, is too costly too repair…the gig is up- we are producing more and more in the USA, again, and, we GLADLY pay more for items that will last more than TWICE as long, and, don't contribute to your "dual economy." And, you KNOW of what I speak regarding that…the gig is up. Keep in mind, that, such a large portion of the oligarchs in China are descended in blood lines and/or ideology from the mongols. China(and Russia) are the neo-mongols. You mongols were stopped from conquering europe and africa. You did not take india, or japan, or viet nam or the saudi peninsula OR Poland, Slovakia, Romania, or Bulgaria, and, you did not make it to the mediterranean. This is about as far as you will go…enjoy it. The gig is up, and, you shall be pushed back to CHina, and, you shall undergo a civil war, and, be restructured into a republic of states. There may be a large percentage of the USA population that does not know much about history or geography(or even the natural sciences), but, I'm sorry to disappoint you, but, I am not one of them. And, there are MILLIONS more just like me in the USA. We KNOW what China's aspirations are, and, we will NOT let you prevail in your twisted endeavors, "

  12. so… its exactly what happened in 2008. Repackaged thousands of loans with outright fake risk values. Fuck. Its going to be big.

  13. The Chinese economy is an export economy if for any reason world economies go into recession thus buying less they have plan b. China must buy oil and food for their people.

  14. I'm confused, China is a closed banking system, selling and lending to itself at a control interest rate. It's identical to a Private company where you can Charge Off Bad Loans to yourself, then keep modifying who exactly you lend to.

  15. if china goes bust then new era of crisis will come knocking every countries door markets are so interwind now that if one big economy like china collapeses then the result will be devistating

  16. Aaaah I expected Chris.
    So I was like "Woah! This guy?? Did they substitute him with this dude!? I don't like it!!"
    Then he says "he's in vacay"
    "Aaaah. Oh well you can't stop someone from having a vacation. It's their right".

  17. "…the demand for borrowing got so high that banks didn't have enough money to lend." That's the most absurd words I've heard. Modern money creation does not come from deposits nor reserves, and not even reserve multiplication except for the US. Banks lend money by simply writing down the numbers into their books and make the money out of thin air. They do not lend their own money whatsoever.

  18. enough already with the "south china sea" gag. it wasn't a thing and not nearly as funny. on the other hand you guys are the best out there, keep it up.

  19. I can't see how the banking system can take much more of the housing problems they have. Their banks have loaned out too much money to interest groups who built too many homes and in many cases total new cities which is empty. The country also loaned out money to other countries which won't be able to pay it back.

  20. Chinese christian prophet muhammed is not girl rapist prophet muhammed relation with women is based on marriage and approval from family it is well known that islamic marriage is based on ijab and qubul i.e. mutual consent you have problem with prophet marriage first see this gotquestions.org- age of marriage in bible losalamosministries.com- legally married at puberty and hes not a racist nor is his faith answering christianity-is islam racist fuck off your jesus said to canaanite women that she is dog now whose racist

  21. Felt betrayed the first 2 seconds when i saw Chris was gone. China uncensored never disappoints and still delivered the same humor and simple to understand information as usual.

  22. hey mr. DjtrUMP
    what will you do when the PRC comes to cash those G-bonds?
    That your tax break has added nearly $3 Trillion more to the debt.
    Lower taxes brings more tax revenue?!
    Ft. Knox; I don't think so, thanks to the first Tricky Dick.
    anyone have other Ideas?

  23. We laugh a lot until the first person throws a brick and Chinese being conformist all start throw bricks everwhere. Maybe even a Falkland style war against Taiwan. British style diplomacy get a royal pregnant or start a war. Always distracts people.

  24. The CPP government has a genius financial model. They have evaluated the risks of shadow banking and hedged against the risk of financial collapse due to bad debts by choosing foreign countries' government projects involving key ports and important infrastructures as the recipients of their 'loans' and then making sure they get 'investments' into their economy by dictating that loan terms require the foreign governments to choose construction contractors from a list of China's state-owned companies AND requiring them to hire Chinese workers. On top of that, they minimize the risk from default on debts by ensuring loan terms provide for control over the funded project will pass to China (along with the area around it, when necessary) if the foreign government is unable to pay its debt. It's a genius business model because China always makes sure it has funds to lend by submitting the lowest bids in open bidding projects around the world, and encouraging free market enterprise so multinationals are encouraged to conduct their operations in China to take advantage of economies of scale and cheap labor, while at the same time it diminishes the foreign governments' revenues by making sure they earn less taxes since the projects funded by China require Chinese contractors who source materials from China and require Chinese workers, who may not be paying income taxes in the countries they work in, especially if they got in illegally (as is the case in the Philippines, where the finance secretary estimated tax revenue loss of Php 3 billion/month in the 1st quarter of 2019).

  25. The US was complisite in PRC shadow banking during the Obama years, but today the Trump Admin. has put the squeeze on China's crooked economy.

  26. It's plain to see the free world has to destroy the Chinese CCP! Once and for all! Here is wisdom, never buy anything, or sell any thing to a Chinaman! Period!

  27. Good! The whole world should be stop businesses with China, because they are controlling the whole world now! Big bullying to their neighbors country, stealing all over the world!!fuck the China,,,

  28. A lot of people don't believe it. I believe that when China economy finally collapsed,Cambodia will also follow. China has a lot of factory in Cambodia and a lot of black money flowing around in Cambodia.People are getting rich over night here over land. China is buying land like there is no tomorrow. When China does collapsed and the EBA is finally take affect,Cambodia economy will also take a head dive. There are a lot China investors here investing in land and cleaning black money by using Cambodia market.

  29. alot of china international student and ESL teachers are commenting on sensitive channels. lmao After emperor Xi die, China will be liberated.

  30. In the next 30 years, China economy will collapse. China's aging population, low birth rate and gender imbalance will sent its economy to nose dive. China will not recover from this.

  31. In my understanding according to your presentation, this SHADOW BANKING is the Financial Trading System or it is how the Trading works out – I call it ELITE GAMBLING!

  32. Is it just me or does Matt look baked? Not that I care.. I mean I love the pot as much as anybody… But. . Well, .. what? What was I talking about? Oh yeah,. China Uncensored is awesome!

  33. So everyone is waitng at the arse end of the unicorn hoping that the creamy icecream unicorn shit doesn't run out while they are still at the back of queue.Hooray for unicorn shit.

  34. Banking and Credit Unions rely on Finance (Money), and also, Criminally, "Marketing" to appear as the "more wealthy" and "thus" "more legitimate" "Government".

  35. You know how the bad lending practices in the US destroyed the economy in 2008? Let's do that exact same thing again, but BIGGER!

  36. That ad ??? What an in you face load of BS. And US was thinking of investing pension funds in China AAAAAHH !!!

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