Tags: China | yuan | shadow | banking

MarketWatch: China May Be on a Spike Between Credit Growth and a Cheap Yuan

Image: MarketWatch: China May Be on a Spike Between Credit Growth and a Cheap Yuan

By John Morgan   |   Monday, 24 Jun 2013 11:01 AM

China's escalating credit crunch may reveal deeper fissures than expected, as excesses in shadow banking foil central authorities, and as a loosening on the lid of the yuan could yet be felt around the world — but not in a good way.

The People's Bank of China is accustomed to wielding unquestioned power because the state owns huge portions of the economy. But according to MarketWatch, China's central bank may be saddled now with old policy tools that do not reflect globalization of the world economy.

"Now it's scrambling to find a way to manage a financial industry where the majority of new credit creation is beyond its regulatory reach," MarketWatch said. "Shadow banking, with its associated wealth-management products and trust funds, looks particularly elusive to manage."

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Put the World’s Top Financial Minds to Work for You

Credit growth has not been lifting China's economy in 2013, even as China has been simultaneously increasing the circulation of the yuan in foreign markets.

"As capital controls are loosened, this will potentially make China's financial markets more vulnerable to external capital shocks," MarketWatch predicted.

It is possible foreign capital may be exiting China, as the nation's typical trade surpluses may be declining on account of export competition from elsewhere. If that is the case, MarketWatch suggested China may be forced buy foreign currency with the yuan to maintain its favorably low exchange rate.

"This would mean China has a difficult choice to contract money supply and economic growth, or allow its currency to depreciate. The latter will not be favored, given that China's leaders have set a course to internationalize the yuan."

Chinese stocks had their worst day in more than three years on Monday, falling into bear market territory over fears about the financial sector there, according to the Financial Times.

The Shanghai Composite Index tumbled 5.3 percent to 1,963, its lowest close since January 2009.

Erwin Sanft, China equities strategist at Standard Chartered, told the Times that the market is responding to the "clear signal" that the central bank is trying to rein in growth in lending.

"China has had a credit binge for way too long," Vasu Menon, head of content and research at OCBC Bank Ltd. in Singapore, told Bloomberg TV. "The government is trying to rebalance the economy, trying to downsize the shadow banking system. All that means credit is going to remain fairly tight."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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