Zero Hedge
All posts from Zero Hedge
Zero Hedge in Zero Hedge,

3 Charts To Prove That 'Shadow Banking' Could Collapse The Entire Financial System

Despite seeing the world economy and global financial system experiencing a total meltdown and despite multiple pledges from policy makers all over the world to ban shadow banking procedures, no steps have been taken at all. In fact, the world of shadow banking continues to expand and the total size of the shadow banking sector is expected to reach 100 trillion USD before the end of this decade (and very likely even sooner).

According to the number one of Hong Kong’s securities and futures commission in a Reuters article, more and larger players have entered the shadow banking market as in the current low yield environment more groups (think private equity) are looking to increase their returns. Consumer lending is obviously a preferred choice as it’s also quite easy to get into. It also causes some sort of Catch 22 problem. On the one hand are these new credit providers adding additional oxygen to the local economies as it enables families to keep or increase the consumption pattern. That’s also the main reason why regulators aren’t too keen on taking strict measures to shut these ‘enablers’ down.


And the culprits don’t necessarily have to be searched for in the Western world, not at all. The previous chart shows that it’s actually China that is causing the huge increase in the shadow banking sector. Whereas the total size of shadow banking was just 15 trillion RMB in 2010, this number has increased (not just increased but it truly EXPLODED) to 50 trillion RMB last year. That’s a Compounded Annual Growth Rate (CAGR) of a stunning 35% per year. If this growth rate continues for three more years, the total size of the shadow banking-style business in China will have grown to in excess of 130 trillion RMB.

This shouldn’t be a surprise as for instance AliBaba is being pointed out as one of the main facilitators of this system as it regularly teams up with lenders so consumers are more enticed to buy the products on the website. But wait, it doesn’t end there. Looking at the official numbers for 2014, no less than 87% of China’s GDP is fueled by shadow banking as the total size of the latter stood at in excess of 8 trillion USD vs the total size of the Chinese economy of $9.24T.


An earlier article on ZeroHedge pointed out the ‘conventional’ financing markets are still contracting and this obviously paves the way for new entrants on the shadow banking scene. Does this also mean the solution could be found in expanding the conventional credit markets again? Well, yes, but the main problem there is that there’s no incentive at all to do so. All Western currency areas have been trying to pump more oxygen in the economy and there really isn’t much more that could be done.

Source: IMF data

But you should also look at the other side of the equation. As the shadow banking sector in the USA is larger than the conventional financial sector you don’t even have to look at China to start to get worried. As the previous chart shows, there’s a disaster in the making and a collapse of the shadow banking system will drag entire fully-developed economies down. It’s time to start preparing yourself.

>>> Check Out Our Latest Gold Report!

Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Commodity Report.

Follow us on Twitter