China may be hurtling toward a cliff country's real estate woes have created headwinds for other segments of the country's economy.
In particular, the so-called shadow banking sector has come under stress as property prices have stagnated while demand for real estate dries up and developers struggle to get the funds needed to finish projects. Many of these developers relied heavily on financing from shadow banks, but now lack the money to make loan payments. Now, some shadow banks are struggling to make their own payments. In recent weeks, Zhongzhi Enterprise Group, a major wealth management company and shadow bank, warned that it no longer had enough cash to pay all its bills, according to CNN.
The company reported total liabilities of about $65 billion USD and only about $28 billion worth of assets. Even before announcing it was insolvent, the Group had missed some payments to corporate investors. Now, many experts worry that China's shadow banking sector could outright collapse. In total, the shadow banking industry is estimated to weigh in at $3 trillion — about the same size as the entire economy of the United Kingdom.
Shadow banking refers to financial services offered outside of highly regulated formal banking channels. Such banking systems offer flexibility, and the liquidity provided can spur economic activity. However, the regulations in the formal financial sector have been put in place to prevent or at least decrease the risk of massive collapses, such as the infamous Crash of 1929 that kicked off the Great Depression. With shadow banks, such protections are minimal, if not non-existent. Some fear this could lead to greater contagion, according to CNBC.
In China, many of the shadow banks are trusts set up to provide steady returns for the wealthy. The shadow banks were long favored by real estate developers to gain access to the capital needed to fund various large-scale construction works. But with cash-strapped developers struggling to pay their bills, shadow banks face enormous pressure with existential stakes. Should the sector collapse, it could greatly curtail investment — and likely consumer consumption — as wealthy and middle-class Chinese see their investments turn sour. This would create further headwinds in an economy already struggling to find its footing, according to The Financial Times.
