Shadowboxing

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By Kevin Grant McClernon

A string of defaults by Chinese firms could spell trouble for the Chinese economy. Debt defaults are never a good thing. They are even worse when the lenders are in “the shadow.” “Shadow lending” is a process by which companies unable to secure traditional financing from banks turn to other companies for loans. Following the international credit crunch after the financial crisis, the Chinese government condoned shadow lending as an alternative means to provide liquidity to a still-growing Chinese economy. Shadow lending increased about 125% in 2010. As of 2015, the total outstanding balance of shadow loans in China is about 22 trillion Chinese yuan (about $3.5 trillion). It is a dangerous practice -- the potential repercussions are significant. One firm defaults on a shadow loan, endangering the balance sheet of another. Then another. And another. As the process continues, the theoretical domino effect multiplies and the trouble extends throughout the economy – beyond just the financial system. As China’s government scrambles to save the faltering economy, shadow defaults could be an unanticipated punch in the gut.

Sources

http://on.wsj.com/1Cn7Nw3

http://on.wsj.com/1bqOdoq