CHRIS GAFFNEY: China’s Shadow Banking is the One Thing It Cannot Control


          Chris Gaffney

Managing Editor’s note: We’ve invited one of our Irrational Economic Summit speakers, EverBank’s Chris Gaffney, to write to you today to offer some insight on what he sees happening to China’s rapidly slowing economy right now, and what might be coming next.

Chris brings an experienced perspective to the global economy, gained through over 20 years of daily exposure to the markets. He’s been a Chartered Financial Analyst since 1994. And from the EverBank World Markets Desk, he has helped many clients achieve broader global diversification for their portfolios. We are pleased to have him speak at our October Irrational Economics Summit; be sure you don’t miss him.


By Chris Gaffney, SVP & Director of Sales for EverBank

The Fed, central banks and markets are unlike anything we’ve ever seen and our GDP is settling in solidly at around 1%. The times, they are a changin’ here in the U.S.

And just as Harry’s been saying for years, our demographics here in the states will not provide the growing population we’ve had driving this country’s economy since the end of the Second World War. But of course, we’re not the only player in the world markets and right now, it’s India and China that have the population to drive new economic engines.

And China’s where it’s all at right now.

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I should know. I’ve been watching them like a hawk since their GDP rates began skyrocketing in the early 1990s. It’s been dancing with double-digit growth rates for more than 20 years, as it shed a state-run economy and opened up to global free-markets.

As with most emerging economies, China came out of the gate manufacturing. It used a tightly controlled currency to pay a low-wage work force that filled the world with manufactured products ranging from plastic spoons to semi-conductors.

The question on everyone’s mind right now though is: can they keep it up?

China has struggled over the past several years to emerge as a more advanced consumer-based economy. This requires the manufacturing portion of its people to save money and begin spending, igniting the consumer cycle. These folks are building up China’s expanding middle class. Only, they’re not so much igniting anything as they are slowly, but consistently simmering.

They will eventually reshape the emerging world. Already, the Chinese are investing in property so heavily that in some areas home ownership is at 200%. It’s just going to take longer than the Chinese governrnment wants.

And there’s a problem…

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China has a glut of housing because Chinese residents are steering clear of a volatile stock market and speculating in the housing market. We saw how well that worked in the U.S. back in 2008.

And this is just one of the dozens of bubbles China has inflated… all of them threatening to pop at any time.

In 2008, Americans could access easy credit and they took full advantage until the bubble exploded.

But in China, the governrnment tightly controls Chinese banks. So the Chinese turnrned to the black market for money. If we see a black swan event, something that starts to burst that Chinese property bubble, it’ll come from this “shadow banking” sector. It’s the lighted fuse in the gunpowder keg.

I call it this just one, potential $8 billion black swan lurking within China’s banking industry.

Many of China’s state-owned banks are broke, like Hebei Financing Guarantee Group (HFGG), the largest loan guarantee company in the region of Hebei. Unfortunately, HFGG guaranteed about ¥50 billion in loans, more than $7.5 billion in today’s U.S. dollar. This is one bank that’s issued dozens of loans on shady financial packages that will largely vanish after the first default. HFGG’s former president was taken away in chains just a few months ago. It’s a bad situation.

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Defaults are already well under way. In 2014, failed guaranteed loans swelled to 86%, at about $63 billion. Again, one spark in the right place, at the right time, and… boom.

I’ll share details on this with you closer to the Irrational Economic Summit this October in Palm Beach.

It’s an exciting time in the world as economies sail through uncharted lands of shadow banking, negative interest rates and stock markets completely disconnected with reality, but navigating the new normal requires learnrning fresh ways of looking at our economic future. That’s what we’ll help you do in October.

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Chris Gaffney