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2017 | Book

Introduction: The Mayor of Coal Town Read chapter Read first chapter

Shadow Banking and the Rise of Capitalism in China

Author: Andrew Collier

Publisher: Springer Singapore

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

This book is about the growth of shadow banking in China and the rise of China’s free markets. Shadow Banking refers to capital that is distributed outside the formal banking system, including everything from Mom and Pop lending shops to online credit to giant state owned banks called Trusts. They have grown from a fraction of the economy ten years ago to nearly half of all China’s annual Rmb 25 trillion ($4.1 trillion) in lending in the economy today.

Shadow Banks are a new aspect of capitalism in China – barely regulated, highly risky, yet tolerated by Beijing. They have been permitted to flourish because many companies cannot get access to formal bank loans. It is the Wild West of banking in China. If we define capitalism as economic activity controlled by the private sector, then Shadow Banking is still in a hybrid stage, a halfway house between the state and the private economic. But it is precisely this divide that makes Shadow Banking an important to the rise of capitalism. How Beijing handles this large free market will say a lot about how the country’s economy will grow – will free markets be granted greater leeway?

Table of Contents

Frontmatter
Chapter 1. Introduction: The Mayor of Coal Town
Abstract
The chapter gives a brief introduction to China’s fiscal stimulus in 2008 and the increase in Shadow Banks thereafter. These included Trusts, Wealth Management Products sold by banks, and other financial intermediaries such as online lenders. The Introduction also discusses the fiscal imperatives in China’s local governments that drove the Shadow Banking market. These include the need for non-tax revenue from sources such as the sale of land and property. In addition, there is a brief synopsis of the importance of a new form of quasi-governmental company, called Local Government Financing Vehicles. Last, the author concludes with a discussion of the risks and benefits of Shadow Banking in China.
Andrew Collier
Chapter 2. Early Shoots of Informal Finance
Abstract
This chapter delves into the origins of informal finance in China. It provides a brief summary of the early days of financial and economic reform under Deng Xiao Ping and the power struggles that ensued within the leadership in Beijing, drawing on work by Susan Shirk, among others. It then incorporates the changes in the banking system with the establishment of the state banks and the importance of the concept of “financial repression” to China’s economy and fiscal system. The author describes some of the early forms of financial intermediation such as rural credit cooperatives.
Andrew Collier
Chapter 3. China’s Great Financial Push
Abstract
This chapter focuses on China’s 4 trillion yuan fiscal stimulus in 2008 and the effect on the Shadow Banking market. It describes the American mortgage crisis and the impact on the Chinese leadership’s analysis of its impact on the Chinese economy, China’s launch of a domestic stimulus package to avoid a downturn related to the mortgage crisis, and the unintended consequences of the stimulus package and relationship to local government financing. A brief discussion of the role of the banks in funding state and private enterprise in China is introduced.
Andrew Collier
Chapter 4. Federalism
Abstract
The chapter discusses the Federalist nature of China’s fiscal system under which provinces and localities are responsible for a substantial portion of fiscal expenditure. It describes Zhu Rongji’s fiscal tax reform of 1992 and the repercussions on local governments. The chapter also discusses the IMF estimate of an 18 trillion renminbi gap between local revenue and expenditures between 1998 and 2012 that was filled through land sales and Shadow Loans. It explains the importance of land in China’s local government financing. The methods utilized by local governments to generate revenue outside of the official tax channels are described.
Andrew Collier
Chapter 5. The Rise of the LGFV
Abstract
The chapter describes the creation and importance of non-governmental channels for capital raising primarily through a new type of company, called the local government financing vehicle (LGFV). It explains the historical origins of government investment companies. It also discusses the General Corporation of Shanghai Municipal Corporation and the promotion prospects for local officials who promote investment projects. It analyzes one of the largest LGFV defaults, the Liansheng Group and the founder, Xing Libin. It describes the visit to the One Thousand Tree Farm, an eco-tourist LGFV outside of Nanjing. It analyzes the public company, China Vast, and its relationship to local governments.
Andrew Collier
Chapter 6. Don’t Trust the Trusts
Abstract
The chapter describes rise of the Trusts in China and their role in Shadow Banking. It also describes the original Trust Investment Companies in the history of the PRC and their transformation into the Trusts of today’s China. It mentions the history of Citic and its founder, Rong Yiren, and the relationship with capitalism in China. The chapter analyzes the collapse of Guangdong Investment Trust and the rise of Trust assets from 3 trillion renminbi in 2007 to more than 12 trillion renminbi in 2012 and 15.8 billion renminbi by the end of 2015. It then mentions the rules governing Trusts and their ownership structure. The potential for default by Trusts and the impact on China’s economy from a systemic point of view are explained. It reviews the near default of the Credit Equals Gold Trust product and its recapitalization. It mentions the importance of Trust investments to Shadow Banking and the rise of Capitalism in China.
Andrew Collier
Chapter 7. The Banks Jump into Shadow Banking
Abstract
The chapter describes the growing involvement of the formal banks in the sale of Shadow Banking products. It analyzes the impact on bank profits of the sale of Wealth Management Products (WMPs). It mentions a brief history of China’s banking system including the separation of the lending banks from the central bank (PBOC). It analyzes the competitive pressures placed on banks by the growing Shadow Banking system, the impact of regulatory arbitrage on the formal banks, and the relationship between Trusts and banks in Shadow Banking. It then describes the growth of investment products on bank balance sheets as a means of evading lending restrictions.
Andrew Collier
Chapter 8. The Wild West of Bank Products
Abstract
The chapter describes the importance of WMPs to banks and the relationship between bank WMPs and financial repression. WMPs rose from less than 4 trillion renminbi in 2010 to more than 17 trillion renminbi in 2014, and jumped another 57 percent to 23.5 trillion renminbi in 2015. In 2014, the biggest contributors to growth were the joint-stock or commercial banks, whose WMP balance rose 75 percent from 5.7 trillion renminbi to 9.9 trillion renminbi. The chapter explains the impact of the rise in WMPs to savings deposits in the formal banks. We include data on estimations of the concentration of wealth within the banks. It analyzes the breakdown on the distribution of WMPs by channel and describes bank earnings from Shadow Banking products.
Andrew Collier
Chapter 9. The Internet Goes Shadow
Abstract
The chapter describes the rise of the internet in Shadow Banking. It mentions P2P and other forms of online financial intermediation. The chapter analyzes the logic behind online finance, and Alibaba and the growth of its online finance arm, Yuebao. The banks and online finance are also described. The chapter also mentions the potential and examples of fraud in online finance. New regulations for internet finance and the impact on growth are discussed. The chapter also states how the banks responded to this form of financial intermediation.
Andrew Collier
Chapter 10. The Risks of Shadow Banking
Abstract
The chapter describes the potential for systemic collapse of China’s economy as a result of Shadow Banking. It explains the difference between the US mortgage crisis and China’s economic system and the relationship with Shadow Banking. It describes the stock market crash of 2015 and Shadow Banking. Liquidity issues in the Chinese banking system. It includes arguments around financial crises including the balance sheet argument and the credit to GDP gap. The chapter mentions Trusts as the weak link in Shadow Banking. It describes the related transactions and systemic risk and expresses concerns about concentration of risk among local banks and the property market and Shadow Banking and risk. It describes regulators’ attempts to reduce risk in China’s Shadow Banking market and includes a discussion of the risks of moral hazard in China.
Andrew Collier
Chapter 11. What Does the Future Hold for Shadow Banking?
Abstract
The chapter describes the role of LGFVs in Chinese capitalism. It details the data on the use and misuse of capital by LGFVs. It explains access to capital by small business and the role of Shadow Banking in SME loans. Moral hazard and the risks of defaults in the private lending market are also mentioned. It describes interbank markets and Shadow Banking and the problem of maturity mismatch. It explains deleveraging in China and the ability of the state to recapitalize financial institutions. It also mentions the “Tightening Circle of Capital” and Shadow Banking. It gives the example of Dongbei Steel in Liaoning province and the relationship to Shadow Banking. It draws on comparisons with the US crisis and describes the regional differences in capital flows.
Andrew Collier
Backmatter
Metadata
Title
Shadow Banking and the Rise of Capitalism in China
Author
Andrew Collier
Copyright Year
2017
Publisher
Springer Singapore
Electronic ISBN
978-981-10-2996-7
Print ISBN
978-981-10-2995-0
DOI
https://doi.org/10.1007/978-981-10-2996-7