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China Shadow Banking Crisis Could Dwarf Subprime Meltdown or Greek Debt Debacle

Unofficial lending could become a far-reaching poison


A national regulator cracking down on non-bank lending companies in China’s shadow banking sector could have a serious impact on the housing market there. Without an alternative to conventional banks, lending naturally would be out of reach for many prospective buyers. That would dampen demand — and could dampen prices as a result.

It goes beyond housing, too. As much as 90% of China car sales are conducted with cash — meaning many of those buyers have obtained a loan under the table to make the purchase instead of financing through conventional lenders. If the shadow lending system in China doesn’t provide financing, how will those sales happen? Auto sales in China already are lagging, and a shock to lending could really shake up what largely is seen as the best market in the world for vehicle sales. That’s bad not just for China, but also for companies like General Motors (NYSE:GM) who have all but bet the farm on Chinese auto sales.

Additionally, many cash-strapped private businesses often simply can’t get loans from commercial banks. Tighter monetary policy in Beijing has made it harder to access the formal banking sector, and state enterprises have a higher priority for the available funds. If Chinese regulators decide to crack down on this kind of lending, many small businesses will face bigger barriers, and that could impact the growth of China’s vaunted middle class.

And those are just some of the obvious and most easily explained issues at play with this banking Gordian knot.

The Real ‘Hard Landing’ for China Businesses

Perhaps the most disturbing fact of all is that shadow banking is not just a systemic risk to individual bank accounts. Yes, the lender will take a huge hit and see its savings disappear after a default. But the real risk comes after that — as the personal impacts of bad shadow lending deals trickle up into businesses.

Consider the boom in Chinese discretionary spending, and the impact that Chinese consumers have within the People’s Republic. Macau casino stocks are booming and represent the most tangible example of Chinese “play money” at work. By most estimates, China will account for about 20% of global luxury sales in 2015. Earlier this year, Prada opted for an IPO in Hong Kong to ensure it was connected to the booming Asian market. The list goes on.

As consumers suffer, these businesses will suffer.

Article printed from InvestorPlace Media,

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