Tags: Faber | China | shadow | banking

Marc Faber: China’s Shadow Banking System Is a House of Cards

Friday, 15 Mar 2013 08:05 AM

By John Morgan

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The next scary risk for global investors is China’s huge credit bubble, according to contrarian investor Marc Faber.

Faber, editor and publisher of The Gloom, Boom & Doom Report, told CNBC that shadow banking practices in China pose a broad financial threat.

"Whether they [Chinese government] can ensure continuous growth will depend on reforms and how to deflate the colossal credit bubble we have in China. This is going to be a huge problem because we have so much underground credit, questionable loans outstanding and questionable investments," he said.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

Faber was also skeptical about China’s export numbers. The reliability of China’s export figures has been questioned because it is inconsistent with data from neighboring countries, according to CNBC.

“I think the economy has slowed down a lot … but they will not miss their 7.5 percent target, they will announce it, but the reality will be much lower.

“If you look at the statistics that are more reliable like Korean, Japanese or Taiwanese exports … then export figures from China don't add up entirely," Faber explained.

The World Bank warned recently that the Chinese economy could overheat from an influx of capital, resulting in excessive credit growth.

The International Business Times reported that the shadow banking system in China is growing at an “alarming rate.”

In fact, nearly half of all new credit is supplied by non-banks or through off-balance-sheet vehicles of regular banks, International Business Times said, up from 10 percent a decade ago.

Of particular concern to some regulators are so-called wealth management plans (WMPs), which are yield-bearing instruments sold by banks that do not have guaranteed principal.

Xiao Gang, chairman of the board of Bank of China, wrote an op-ed in the English language China Daily in which he said the quality and transparency of WMPs are “worrisome.”

"To some extent, this is fundamentally a Ponzi scheme,” Xiao said, according to the International Business Times.

China intends to rein in its shadow banking system by requiring banks to provide greater disclosure about their off-balance sheet activities, the Financial Times reported.

China’s shadow banking system has quadrupled in size since 2008 and now represents 40 percent of the nation’s economic output.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

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