Investors are worried that defaults in China's shadow banking system could trigger a financial crisis. Chinese policymakers have also grown increasingly cautious, issuing a new set of guidelines this year, known as Document No. 107 to curb the shadow banking sector.
While manufacturing and services PMIs disappointed, the big problem in big China remains that of an out-of-control credit creation process that is blowing up. As we previously noted, instead of crushing credit creation, the PBOC's liquidity rationing has forced distressed companies into high-interest-cost products in the shadow-banking world.
The market is still floundering from last week’s selloff. The Dow, for instance, is down over 500 points since last Tuesday.
Commentators blame a weak Chinese manufacturing survey, but I think it has more to do with the imminent test of China’s shadow banking sector…
CHICAGO — U.S. Federal Reserve Chairman Ben Bernanke said on Friday that the shadow banking system still posed a threat to financial stability, and funding markets might still not be able to cope with a major default.
In a wide-ranging speech explaining the Fed’s role in monitoring the health of the banking system, Bernanke also laid out how the central bank was looking at asset markets closely for signs of excessive risk taking.
Not to alarm you, but in the midst of all this emerging market turmoil — partly based on fears of an economic slow down in China — Claremont McKenna professor Minxzin Pei writes in Fortune that China's shadow banking sector experienced a big hiccup this week.
Over four years ago, in "Chasing the Shadow of Money", Zero Hedge first presented a curious if perverse aspect of the Fed's QE experiment in the context of the modern monetary system: the extraction of "quality" collateral by the Fed's daily purchases of Treasury (and MBS) securities, and it replacement with reserves - a transformation which while boosting asset prices, results in an ongoing deleveraging of shadow liabilities, as well as a persistent slowdown in the velocity of collateral (due to both its incre