The Noah Project

Rebuilding a sustainable world.

Shadow Banking Poses Threat to China’s Economy

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Frank Langfitt delves into how China’s new leaders are confronting  threats to their economy:

Last week was a wild one for China’s economy.

Interest rates on the loans that banks make to one another soared to alarming levels, and lending began to freeze up. Shanghai stocks nose-dived, taking Asian markets and the Dow, briefly, with them.

Things have calmed down, but the crisis showed how China’s new leaders are trying to confront threats to the health of the world’s second-largest economy.

In this particular case, the People’s Bank of China — the nation’s central bank — wants to cut down on rampant and risky lending. So earlier this month, in a departure from the past, it refused to pump money into the system when some banks desperately needed it.

Of particular concern is what’s known as China’s “Shadow Banking” sector:

Here is an example of how shadow banking can work and why it concerns the government: A state-owned company borrows from a state-owned bank at a government-set low interest rate, maybe 5 percent.

The company then re-lends the money at a much higher rate of return, say 10 or 12 percent, to a private trust company that is part of the shadow banking sector. That trust company then lends the money into a more speculative part of the economy, such as real estate.

In order to avoid a crises, not unlike America’s subprime mortgage meltdown, the Chinese leaders are putting pressure on the shadow banking sector as a first step in a long process to build a new, more sustainable and efficient economic model.

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Author: Daniela

I was born in Croatia, at that time Yugoslavia. My family moved to the US when I was very young, but I still treasure the memories of my grandfather teaching me how to protect myself against the "evil eye," my grandmother shopping early every morning, at the open air market, to buy the freshest vegetables for the day's meals, and the traditions that were the underpinnings of our society. Someone once noted that "For all of us that want to move forward, there are a very few that want to keep the old methods of production, traditions and crafts alive." I am a fellow traveler with those who value the old traditions and folk wisdom. I believe the knowledge they possess can contribute significantly to our efforts to build a more sustainable world; one that values the individual over the corporation, conservation over growth and happiness over wealth.

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