Systemic Risk (I): Shadow Banks and Local Debt

Abstract

As the Impossible Trinity descends upon China, exposing it to external shocks and policy choice dilemma, a major concern has emerged about systemic risks derailing its structural reform programme. The main worry focuses on China’s shadow-banking market, to which the official banking system is tied. Some observers even see Chinese banks as the world’s biggest systemic risk (Wall Street Journal 2014). There is also a worry about local government debt, which amounted to about one-third of China’s GDP in 2013. Owing to its rapid rate of growth, at an estimated 67 per cent a year between 2010 and 2013, some analysts worry that local government debt has grown so fast as to become a major national burden and an international concern (Economist 2014).