Saturday, February 15, 2014

The Shadow-Banking Credit last year, accounted for 29% of China’s total Credit

The shadow-banking system emerged to meet the demand from private firms and SOEs for extra liquidity to help them cope with the slowing economy and fulfill their investment commitments. Private-sector entrepreneurs in cities like Wenzhou were willing to pay annual interest rates as high as 15-20%.

On the supply side, savers – including wealthy households and corporations with surplus cash – wanted positive real interest rates on their deposits. Loan-guarantee institutions, trust companies, and others sought to benefit from the gap between the 3.5% return on one-year fixed deposits in the official banking system and rates of up to 20% in the shadow-banking sector. The result was a 43% increase in shadow-banking credit last year, accounting for 29% of China’s total credit. - in

Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
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