Courtesy of Larry Doyle.
As I navigate the markets and global economy, I am always on the lookout for sectors and regions where leverage has built up to the point where it bubbles over and needs to be reined in. In the process, markets tend to retrace.
On this note, I drew attention to what I deemed our current, greatest market risk when I wrote in mid-January about the shadow banking system in China (What Is Greatest Global Risk Lurking In Shadows? Look East).
Much as the shadow banking system in our country grew to the point where it was lending 40-45% of the total credit that flowed into our economy, the explosive growth in the shadow banking system in China now equates to a not insignificant ~60% of China’s GDP. Why should we be concerned? Did you notice the recent 8% decline in the price of iron ore and a similar decline in the price of copper stemming from concerns over the Chinese economy? A slowing in China presents a challenge for those entities that have borrowed short (paying dearly in the process) and lent long and leveraged up in the process.
Institutional Investor writes a “must read” for anybody who cares about keeping their pulse on risks in the global markets and economy.
I strongly recommend reading China’s Shadow Banking Sector Poses Risks to Economy.
