FORTUNE -- Just before China shuts down for the next week for the Chinese New Year, independent research firm GK Dragonomics has released a fascinating report for people worried about China's latest shadow banking product. We're talking about so-called wealth management products, retail investments that pay higher yields than deposits. One of them was named Credit Equals Gold No. 1 and needed a state bailout this month after failing to repay loans to wealthy investors.
What Dragonomics' Joyce Poon observes is that U.S. and Chinese banks are quite similar in how they schemed to push lending off their books and avoid loan-to-deposit limits. During the U.S. credit buildup of the mid-2000s, the product was CDOs. In China, it's wealth management products, or WMP, which grew 40% to $1.66 trillion from late 2012 to Sept. 2013, says Poon.
Poon writes the key contrast between the booms in U.S. and China is as follows:
"The big difference between the two economies is that China's non-bank lending does not involve genuine securitization. In the U.S., risk got fully dispersed from bank balance sheets and collateral was used multiple times further down the securitization chain for funding. Of course, during the 2008-09 crisis, U.S. banks were forced to take many non-performing assets back on balance sheet. The difference in China is perhaps that banks have no illusions about the ultimate recourse to them. Measured in these terms, China's systematic risk remains within reasonable limits."
You can judge those reasonable limits for yourself:
Poon goes on to say that private sector credit in China is fully funded by domestic savings, which continue to grow. Compared to the leverage U.S. banks built up during the 2000s via securitization, not backed by adequate capital, China looks better.
The conclusion is that WMPs won't bring down the Chinese economy. But it is true that they are a symptom of a bigger problem: Banks are skirting the Chinese government's intentions to reduce risky lending. It seems the government still has a long way to go.
The prospect of the first major default connected with the Chinese shadow banking system sent shock waves through the financial markets of emerging economies. Expect more close calls to come.Jan 29, 2014 11:47 AM ET
To get out of quantitive easing, the Fed is considering Wall Street engineering that may wind up boosting the shadow banking system.
FORTUNE -- Ben Bernanke may have to pump up the shadow banking system in order to stop manipulating the bond market. At least that's how some see it.
For months, there has been talk inside and outside the Federal Reserve that the U.S. central bank might have to use an MOREStephen Gandel, senior editor - Sep 25, 2013 10:46 AM ET
The idea that the recent banking squeeze was deliberately engineered by the People's Bank to crack down on the shadow banking system makes little political sense.Jun 27, 2013 5:00 AM ET
Slowing growth of the world's second-largest economy might put it on the right path.
FORTUNE – China's cash shortage has roiled markets over the past few weeks, as investors fear a liquidity squeeze across the nation's banks could further hurt growth in the world's second-largest economy.
While that might likely happen, the credit crunch is actually a good thing for China and the rest of the world.
China's banking system is opaque, if MORENin-Hai Tseng, Writer - Jun 26, 2013 10:57 AM ET
The best way for China to tame its out-of-control shadow banking system is by ramping up its monetary printing press, not turning it off.
By Cyrus Sanati
FORTUNE -- China's over-leveraged banks may be the least of the nation's economic problems at this point. What has traders from Hong Kong to Wall Street truly worried is the state of the nation's so-called shadow banking system, where the government has little, if MOREJun 26, 2013 5:00 AM ET
I will be blogging the back and forth at the Financial Crisis Inquiry Commission today. Five former Bear Stearns execs including ex-CEO Jimmy Cayne will testify in panels starting this morning and running into the early afternoon.
Then, four regulators including ex-Securities and Exchange Commission chief Chris Cox will testfiy in the afternoon. The lineup and prepared testimony are here.
10:12 Bear Stearns and the kindness of strangers
Was Bear Stearns brought down by MOREColin Barr - May 5, 2010 9:23 AM ET
|The Deep Web you don't know about|
|AT&T cuts prices again|
|Pizza chain Sbarro files for bankruptcy|
|"True Detective" season finale crashes HBO Go site|
|Once bankrupt, Vallejo still can't afford its pricey pensions|