The Chinese banking system has long been afflicted by massive lending to State Owned Enterprises (SOEs), organizations whose purposes did not include repaying borrowed funds. These “Zombie” loans rendered the system unstable. Chinese citizens sought alternative and more secure investment opportunities.
A “shadow” banking system developed which offered savers “Wealth Management Products”, raising prodigious amounts of money outside the control of the banking authorities. Shadow banking assets now total in excess of $16 Trillion. These funds seek the highest return opportunities – often offshore, sometimes dubious and certainly financed the massive growth of organizations such as Anbang Insurance and HNA, prolific deal doers in real estate and finance. The eventual returns on these wealth management products remain to be seen.
The Government of China has acted to reverse the growth of the Shadows by forcing lenders to bring shadow loans back onto their balance sheets. One consequence is now clear. Banks must raise more capital – depressing stock prices and raising interest rates. In February, 2018, central authorities seized control of Anbang, and is actively forcing acquisitors such as HNA, with $90 billion in outstanding debt, to sell assets and reduce debt.