Shadow banking ‘a risk to Chinese stability’, says Schroders’ Wade

China still has the opportunity to prevent a burst property bubble, although the “booming” shadow banking system presents an increasing risk to stability, according to Schroders’ Keith Wade.

Keith Wade
Keith Wade

The latest figures from the National Bureau of Statistics of China show average new home prices dropped in 49 of the 70 cities monitored during November. Prices of second-hand residential buildings fell in 51 cities.

Wade, the chief economist at Schroders, said in an investor call today that easing house price inflation can be regarded as something of a victory for the Chinese government, as it has been attempting to cool the sector for some time through a series of tightening measures.

He also points out that China has a unique ability to “pull the levers” and stimulate or subdue activity within the economy as needed.

“The five-year plan, if you remember, was a plan to build several million houses, so they could actually transfer production away from the commercial side and to what we call mass housing. That would help to cushion things,” the economist explains.

Despite this, Wade says “a little bit of caution” over China’s future prospects is probably necessary, although he asserts that the government’s ability to intervene in the economy will allow it to alleviate most problems.

But the commentator says the extent of China’s shadow banking system, which he claims is “really booming” at the moment, is a potential source of concern.

“A lot of lending is going on that the authorities either don’t know about or can’t control, which could come to a grinding halt if the property market collapses and that could create a rather uncontrolled downturn,” Wade warns.

Last month, the International Monetary Fund warned about a “steady build-up” of vulnerabilities in the Chinese financial sector, highlighting a significant fall in real estate prices, the lack of regulation on shadow banks and high levels of non-performing loans as potential risks.

This was followed by a warning from the People’s Bank of China that property prices are approaching a “turning point” caused by falls in real estate prices, property investment levels and land transaction volumes.

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