Thursday, June 2, 2011

Another Look at the Chinese Shadow Banking System

Here is a recent article on the Chinese "shadow banking system" and their efforts to move local government debt off balance sheet to the central bank. Please remember that the Chinese banking system and the Chinese government are the same things. Jokes aside about comparisons to the closeness of regulators and bankers in the US system, China continues to retain top level Party officials throughout business structures.

Now the Chinese are making plans to spin off some of this debt (once cleaned up) to private investors. (Hmm, I am reminded of TALF and the TOMO purchasing program of MBS by the Federal Reserve in the USA).

Meanwhile China's influence in the world markets continues to make its inflationary effects known in other shores by raising asset prices across the board. This goes back to the old inflation/deflation debate. If measured by asset prices, the West is experiencing inflation. But measured by credit the West is in deflation. In any credit based, fiat system there are hidden losses still lurking w/in the system. Losses from banking and housing based debt are still on the books. The real economy continues to be a miserable place for business owners and CFOs making hiring and R+D based decisions.

The Bottom Line: China's financial authorities are trying to head off a rise in bad credit among local institutions by soaking up the debt through the central bank. Inflation is real in China and most emerging markets. The existence of speculative bubbles and poorly planned loan issues is marked proof of overheating in capital infrastructure.
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