Understanding China, One Blog at a Time

An American in China

China’s Impending Disaster- Debt Default

Posted by w_thames_the_d on January 21, 2014

China is sitting on more bad loans than anyone. They also have shadow banks which give loans to high risk investors. Unsurprisingly, these shadow banks are poorly run and or plagued by fraud.


BEIJING—In the latest sign of trouble in China’s loosely regulated shadow-banking sector, angry bankand insurance customers who bought an investment product that they say has since failed appealed to authorities to help them recoup about one billion yuan ($167 million).

The apparent collapse of the product, which customers said was offered by an investment firm through some of China’s largest banks and insurance companies, represents one of the most prominent defaults in China in recent years. The case underscores concern among economists and analysts both inside and outside China that loans made by shadow bankers—an assortment of trust companies, securities firms, insurance companies and other private lenders—could be subject to defaults as Chinese economic growth slows.

The shadow-banking sector is lightly regulated and opaque, and there isn’t any official data on defaults on these informal loans. But many analysts expect to see more go bad, potentially harming traditional lenders. “We do not see this as an isolated occurrence and expect to see headlines on similar credit events throughout the year,” said Zhang Zhiwei, Nomura’s China economist.

The pace of shadow-loan defaults appears to be “accelerating rapidly,” analysts at Bank of America Merrill Lynch said in a Jan. 16 report. Many of the defaults so far have involved loans made by so-called trust companies, a pillar of China’s shadow-banking sector.


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