With all the massive growth in China, there are serious problems below the surface. The basic problem is that the huge national and local governments are corrupt and cronyism rules. This has led to huge real estate loans that make little sense.
Meanwhile, small businesses who legitimately need capital have to resort to a shadow banking system, and that poses a whole new set a problems. The Chinese government is trying to address the issue.
Risks stemming from China’s shadow banking system and private lending must be “strictly controlled,” and such loans will be curbed, the head of the nation’s banking regulator said.
Loans to local government financing vehicles and the real- estate industry, which also pose dangers for the banking system, can be managed, Liu Mingkang, chairman of the China Banking Regulatory Commission, said at a conference.
The government and regulators have already implemented “effective measures” that will ensure the overall risks are “controllable,” Liu said, according to a transcript of his speech posted on the regulator’s website yesterday.
Premier Wen Jiabao last week pledged to support smaller companies after media reports highlighted a credit squeeze that has driven many businesses to the so-called shadow banking system to obtain loans. More than 80 businessmen in the eastern city of Wenzhou have disappeared, committed suicide or declared bankruptcy to avoid repaying debts to informal lenders, the official Xinhua News Agency reported on Oct. 12.
The story in China is much more complicated than you would learn from conventional wisdom and simple headlines.
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