Despite seeing the world economy and global financial system experiencing a total meltdown and despite multiple pledges from policy makers all over the world to ban shadow banking procedures, no steps have been taken at all. In fact, the world of shadow banking continues to expand and the total size of the shadow banking sector is expected to reach 100 trillion USD before the end of this decade (and very likely even sooner).
According to the number one of Hong Kong’s securities and futures commission in a Reuters article, more and larger players have entered the shadow banking market as in the current low yield environment more groups (think private equity) are looking to increase their returns. Consumer lending is obviously a preferred choice as it’s also quite easy to get into. It also causes some sort of Catch 22 problem. On the one hand are these new credit providers adding additional oxygen to the local economies as it enables families to keep or increase the consumption pattern. That’s also the main reason why regulators aren’t too keen on taking strict measures to shut these ‘enablers’ down.
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And the culprits don’t necessarily have to be searched for in the Western world, not at all. The previous chart shows that it’s actually China that is causing the huge increase in the shadow banking sector. Whereas the total size of shadow banking was just 15 trillion RMB in 2010, this number has increased (not just increased but it truly EXPLODED) to 50 trillion RMB last year. That’s a Compounded Annual Growth Rate (CAGR) of a stunning 35% per year. If this growth rate continues for three more years, the total size of the shadow banking-style business in China will have grown to in excess of 130 trillion RMB.
This shouldn’t be a surprise as for instance AliBaba (BABA) is being pointed out as one of the main facilitators of this system as it regularly teams up with lenders so consumers are more enticed to buy the products on the website. But wait, it doesn’t end there. Looking at the official numbers for 2014, no less than 87% of China’s GDP is fueled by shadow banking as the total size of the latter stood at in excess of 8 trillion USD vs the total size of the Chinese economy of $9.24T.
