Economists Fear China May Depend on Shadow Banking for Giving Boost

After numerous stories of a global slowdown, the Chinese official growth rate has given almost everyone a threat of the future course of the global economy. China is still a major part of the world economy as almost every country is now dependent on Chinese exports. The presence of China is so wide that countries are facing the threat of depression if there is downward growth in China.

It should be noted that the Chinese Government has blamed the on-going trade war with the United States and low demand from major trading partners like the United States, Europe, and India for its low growth. China has released its official report of growth which stated that it grew on a rate of 6.5 percent last year. As per sources, it has set a target of 6.0 to 6.5 for 2019 as well.

It is also evident that the Chinese Government has been taking steps to boost growth. The Chinese Central Bank has recently announced that it would lower cash reserve ratios for the commercial banks. And some experts say that China may depend on the Shadow banking channel for boosting growth. It should be reported that China last year took steps to clamp on the shadow banking system to formalize its economy. And again encouraging on the shadow banking may tarnish its image on the global level.

Shadow banking is when the lending process and other banking activities are done by unauthorized firms lying outside the formal sector in order to avoid regulatory norms and risks.

“The top agenda of (the) NPC this year is to design policies to prevent further decline (of growth rate),” said Xiang Songzuo, a professor at Renmin University in Beijing.

“I think this year, regulators will encourage more shadow banking financing, particularly to the private sector,” added Xiang. Xiang was also heading as a deputy director at the People’s Bank of China and was the chief economist at the Agricultural Bank of China.

Xiang said shadow banking is returning to China again. Along with spending more on infrastructure, China will also have to stimulate growth by encouraging demand, which can happen by lending only. That is the only reason China is allowing a back door entry to shadow banking.

However, some Chinese economists also worry that the allowance of shadow banking may harm the economy as the risks attached to it is enormous. The transactions of the shadow banking are done off the balance sheets, and it may help the crony capitalists of China to gather a pile of unaccounted cash.

If these things happen, it will take no time to burst the bubble of substandard debt leading to a financial crisis. But Morgan Stanley has said that China would most likely manage the risks attached to borrowing from the non-official channels this time, avoiding previous hazards.

Xiang said China would have to walk very carefully as many things are at stake including its own economy and trading aspirations.

“On the one hand, they need shadow banking to finance investment; but on the other hand, they (need to) try to control the potential risks,” he added.

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