Lauded by many of the world’s most important bankers and money managers yet ostracised by China’s financial illuminati, Charlene Chu has nevertheless been consistent in her statement: That the Chinese banking system will, without a doubt, collapse to some degree due to its massive, unsustainable lending.
Working out of Beijing, Chu has tirelessly campaigned to shed light on China’s experiment in credit expansion which has seen it lend almost USD 15 trillion and create an infrastructure boom unequalled in history.
The vast sums involved dwarf the bank statements which led to the Western financial crisis of 2008.
Consequently, Chu is assured a Chinese collapse is only a matter of time.
Shadow banking woes
Raised in America and educated at Yale University, Chu had been a banking analyst at Fitch for eight years up until last month.
Since 2009, this role has involved documenting the creation of China’s massive shadow banking industry.
Now working at Autonomous, Chu is voicing concerns anew: “The banking sector has extended USD 14 trillion to USD 15 trillion in the span of five years. There’s no way that we are not going to have massive problems in China.”
This sums have been exasperated even as Chinese authorities attempt to clamp down on the lending – which is masked in a wide and confusing range of trusts, wealth management products and other methods of borrowing.
Another of Chu’s warning details the interconnectedness of shadow banking to the official banking system.
Whilst many in China claim if shadow banking were to fail, official banks would not, Chu warns otherwise – pointing to the recent Industrial and Commercial Bank of China (ICBC) trust as an example of the relationship between the two divisions.
Prompting fears of a Chinese equivalent of the “Bear Stearns Movement” which foreshadowed the West’s 2008 crisis, the disaster the ICBC’s withdrawal from a RNB 3 billion trust could have caused was however averted.
But this success may not repeat itself in the future.
Whilst Chu believes China’s ability to be more readily involved in defaults means events can be isolated – and potentially therefore rectified more easily than in the West – China’s quick pace of growth may hamper its ability to adapt to a world without shadow banking.
“This isn’t a developed market with a very strong social safety net,” she warns.
“If we get to a situation where we are having severe financial sector problems, the chances are GDP growth is much slower than it is now for a prolonged period of time.”
And whilst no easy solutions are offered, one thing is for certain – as investors become increasingly wary of China’s financial burdens, reasoned opinions like Chu’s will be especially valued for years to come.