Across the major global economies, there are mountains of debt that are ever growing. Even the interest repayment amounts are astronomical so many nations are now trying to assess what they can do in order to reduce these large hurdles.
China, in particular, has placed a heavy emphasis on reducing their debt levels ever since they had the twice a decade Congress this past October.
Regulators in the country are focusing in particular on shadow banking and implementing more stringent rules around asset management in order to aid their efforts to control the market.
These products are high yielding but are still only a portion of the overall banking system in China, which hasn’t stopped the state media form dubbing it as being the “original sin” when it comes to the financial system.
Even if there manages to be a slowdown in the amount of credit growth in China, their debt is still set to be over 3 times greater than the size of their economy by the time 2022 rolls around. This is why the officials that realize that something needs to be done to reign in this mountain of debt before it becomes unserviceable.
Throughout the past ten years, the use of leverage has exploded in China. This has been as a result of the increase in both corporate and household wealth and those people who want to achieve greater returns as bank interest rates have been kept ultra-low.
Wealth management products are the main focus of the regulators as there is currently trillions of dollars’ worth of assets being held in the country at this moment in time. These financial vehicles are utilised when a borrower has some trouble getting a traditional form of bank loan when they want to get funding. This is why these products became so popular as savers would receive much greater yields than regular deposit accounts that are offered by banks in the region.
They also allow the lenders to not have these loans on their balance sheets, as well as navigating around regulatory requirements when directing funds to the borrowers. The goal of the Chinese regulators is to raise the level of supervision when it comes to these wealth management products, as well as getting rid of any potential moral hazards that they pose.
However having said this, those investing in these products believe that the government will constantly have their back in case anything gets out of hand.
President Xi Jinping is all in favour of this drive towards deleveraging and he believes that it is the perfect antidote to heal the Chinese financial system. The chief of the Bank of China has also supported this idea in order to address this important issue of debt, as he has given a number of warnings in recent months about the topic.
It was in April that the regulator first began to clamp down on financial leverage and they have gone after shadow banking in particular to date.
The officials that be in the Chinese government certainly have their sights set on encouraging innovation within their financial system and ensuring that the necessary supervisions and controls are being implemented and followed.
