China's Shadow Banking System Is Worrying: Strategist

The “shadow” banking system in China is the biggest matter for concern for those thinking about investing in the country, Bhanu Baweja, head of research and emerging markets strategy at UBS, told CNBC Tuesday.

A Chinese bank worker attends to a customer.
STR | AFP | Getty Images
A Chinese bank worker attends to a customer.

The “one thing” causing concern was how much is tied up in the so-called “shadow” banking system, which involves banks moving loans off their balance sheets into financial products run by China’s lightly-regulated “trust companies,” which sold over 2 trillion yuan ($308 billion) worth of products in 2010, Baweja said.

Chinese banks officially made around 7.95 trillion yuan worth of loans last year, more than the state target of 7.5 trillion yuan, but analysts suspect that the true number is higher because banks have offloaded loans into the trust companies.

Concerns were raised over Chinese inflation Tuesday after it hit its highest level in nearly three years in May. The consumer price index posted a 5.5 percent annual rise in May, up from 5.3 percent in April, as food prices continued to shoot up.

This was the highest rate since July 2008, when the index rose 6.3 percent, and far above the government’s target of 4 percent. This could lead to more government measures to control inflation in China, which recently overtook Japan as the world’s second-largest economy.

The People’s Bank of China raised bank reserve ratios Tuesday to 21.5 percent, a record high, as it tried to keep a lid on inflation. This was the ninth rise since October.

“This doesn’t necessarily equate to more tightening,” Michael Kurtz, head of Asian strategy at Macquarie Group, told CNBC. “Chinese GDP is still on track for something like 14.5 per cent and there are no signs of a real estate crisis. Asset prices have probably improved over the year."

“If you look at the valuations of Chinese stocks, there’s a perception that if China doesn’t get a handle on things it will lead to overheating. The more China gets a handle on inflation, the more the market will calm down.”

“If anything, China let itself go without tightening for far too long,” Baweja said. “Monetary policy is still fairly loose.”