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Sign up with Google Sign up with FacebookQ: Can anyone explain in simple terms how bad shadow banking is in China?
Admittedly, I don't understand much in the way of economics, but everyone is saying shadow banking is what's killing the Chinese economy. Could someone who understands this explain it in simple terms?
12 years 27 weeks ago in Money & Banking - China
The so-called "shadow banking" in China, at best according to experts, is not over 20 % of the loan market in China. But in the last five years or so, in its effort to control inflation in China, the Central Government has tightened some rules, increased the finnancial requirements of capital for local banks, in an effort to "cool" (slow down inflationary pressures) the economy. As a result of this, money for loans to business needs became scarcer, and the "shadow banking system" as a result, has grown up.
What is "shadow banking" ?. In a short statement, it is a paralel finnancial group which arranges loans at high interest rates for many of China’s small and medium enterprises with little access to the country’s large banks, which favour state-owned enterprises due to the shortage of funds (deposits) and the higher risk involved with loans to small and medium business.
These loans and their higher interest rates are a heavy finnancial burden to the owners of the small business involved with them, but they have to other way to get the capital needed to properly finnance their operation. As a result, a lot of failures, even owners jumping off windows or other types of suicide attempts have been reported by the local press.
Hope this short reply satisfy you.