In a piece for the Annual Review of Economics (a publication by academics, for academics, about what other academics are up to) Zhiguo He of the Booth School of Business and NBER and Wei Wei of the Becker Friedman Institute (both Booth and Becker Friedman at the University of Chicago) review the literature on China’s financial system.
To make sense of it they arrange their review around the subject of Aggregate Financing for the Real Economy (AFRE) or what’s often just described as Total Social Financing.
They review six elements of China’s credit pump and highlight where research on each has been going and what the main characteristics of each sub-section has been discovered to be.
My summary below is necessarily superficial but if any of the subjects are of specific interest, dive in to the details at your leisure
The Stock Market; in 2021 despite its size provided only 3% of AFRE. On balance, the experiment in time may be judged a failure. There’s a persistent problem of governance because ownership isn’t really shared.
The Banking System; it, and it’s close relative (more on this below) the shadow banking complex continue to dominate lending. In 2021 this was the avenue 67% of credit flowed up to the real economy from.
The Shadow Banking System; an area that’s grown rapidly in recent years is far less shadowy than in other large economies. It is, in fact, a regulatory arbitrage mechanism closely related to the big banks.
The Bond Markets; these have also grown rapidly in recent years and are, in some way, the most progressive parts of China’s developing financial system. Defaults have been a very encouraging sign of maturity.
Fintech; the jury is out. From about 2010 or so the government seemed ‘extremely’ keen to foster this area. But recent moves suggest greater ambivalence. Ant is a good example of the shift.
Peer to Peer Lending; this looks like an evolutionary dead end. Like Fintech it was fostered until it got out of hand and its now being squashed. This development, most likely, won’t be recovered in any form.
The compilers of the review stay away from controversial industry conclusions so I’ll put in my own two pennyworth.
The impression I was left with at the end of this read was of schizophrenic development that has, ultimately, led back to control in the hands of the big banks. Which is probably not the best of results long term. A kindly report card might read ‘Must try harder’.
You can read the paper in full via the following link China’s Financial System.
Happy Sunday