Sunday, December 25, 2016

Avoiding a Cash Crunch

China’s central bank said the country needs to be careful to avoid creating an artificial liquidity crisis. Regulation is needed to avoid excessive borrowing and lending and the speculative bubbles that can result. Rules that were too broad, though, could cut off legitimate lending forcing businesses to slow down operations in a cash crunch. The comments came in an op-ed published today.

Wednesday, December 21, 2016

US Auto Furloughs

A slowdown in US auto sales is another sign of decline in global manufacturing. US automakers are furloughing thousands of workers for the next few weeks as they face 2017 with excess inventories not seen since the bankruptcy year of 2009. Auto sales are down from 2015 in most of the world, but spiking in China as consumers buy before the expiration of a tax incentive.

Thursday, December 8, 2016

Shadow Banking Hides Bank Loans

Shadow banking is in focus again as banks try to hide loans from regulators. Large business and real estate loans by Chinese banks have come under heightened scrutiny with regulators and central planners trying to rein in a two-year credit binge. Banks have responded by setting up shadow companies in order to disguise some $2 trillion in loans as investments. In this scheme, the bank records its interest as an investment in a shadow banking fund or company. The fund, in turn, holds the loans to real estate developers, factories, importers, and other borrowers. It’s a mechanism for banks to get around reserve requirements by reclassifying loans as investments. This is laid out in detail in the Fortune story “China’s Credit Binge Has Driven Its Banks to Hide $2 Trillion in Loans” [ ]. The off-balance-sheet risks make the financial system more brittle at a time when the central bank has promised there won’t be any bailouts.