The impact on the Profitability of Commercial Bank from the Chinese Shadow Banking

YIN+HENGBIN

Abstract：From 2008 world financial crisis， liquidity risk was expanded since small and medium manufacturers bankruptcy， so many shadow banking system appearance that affect commercial bank's profitability. Through analysis， we can to know this correlation， outbreak of shadow banking caused by default of local governments debt， this debt had negative （-） effect to profitability of commercial bank.

Key words：shadow banking；commercial bank；profitability；liquidity risk

China faced the inactivity of the export trade because of the financial crisis that is departed from U.S in 2008， for this， the liquidity risk is expanded because the medium-sized manufacturers which are export led businesses got the blow. In this situation， for the central bank of China carried out the policy that regulates the loan and increased the demand for the bank to have higher ratio of owners equity and liquidity， the banks expanded the shadow banking through outside loans or the cooperation with other financial organs， Medium and Small manufacturing companies that face the financial difficulties faces the situation to use shadow banking to solve the liquidity， it ultimately resulted in continuing increase of the interest on a loan because of the situation that the demand inverse proportion to the supply.

In 2013， according to the estimation of shadow banking in China by S&P， the scale of shadow banking is 44% of GDP， and the Zhaoshang bank in China estimated it 54% of GDP. Summing up all the estimation， the total amount of Chinese shadow banking is from minimum 11 trillion yuan to 36 trillion yuan. The critical mind about shadow banking emphasized from April 2011， when the 19 manufacturing companies bankrupted serially in Wenzhou City， Zhejiang Province of China with the consideration of high interest risk.

Lets look the high interest process of Chinese shadow banking through diagram：

A depositor <- state-owned commercial bank（paying interest of 3%） <- trust company（paying interest of 8～15%） <- real estate， medium-sized manufacturing company（paying 20～30% of high interest rate）.

The reason for the formation of this structure of shadow banking is the major companies can get loan with low interest rate easily without considering their operational efficiencies or profitability because of the monopoly of stated owned financial organs while the private owned companies problem of liquidity is only solved by the private financial organs， and this lets the high interest shadow banking exists. But， after the overheated Chinese real estate market， because of the collapse of bubble and policy for reinforcement of domestic market and strong tendency of yuan， the symptoms of long term inactivity of the export trade， over investment of base infrastructure from the local government makes the profitability of major companies bad， and this makes them cannot afford the high interest rate.

And also the shadow banking is sensitive to the asset price. Since the shadow banking gets profit by funding in the form of short-term debt， and then it has the structure that gets high interest， high profit by long term investment to individuals， companies， assets， the symptom called “maturity mismatch” happens.

Therefore， when the price of asset decreases， then it sells the assets to refund the short-term debt for the secure of flexibility， and when the provision asset rises temporarily， the price falls even more. Ultimately， the short-term debt cannot be refunded because of this vicious circle.

=> This research went along to not only to apprehend which factors of shadow banking impact on the profitability of commercial bank but also give help to evaluate the public investment risk of Korea. Since the default of Chinese manufacturing companies， and even bankrupt of commercial bank gives loss those that linked with it such as cooperative banks and companies， and makes them face risk， it is expected that this Article can give （+） effect on stabilization of Korean finance.

When it comes to the Chinese economy， the politicization of shadow banking is resulted from the structural properties of Chinese financial market because the market interest of commercial banks is not determined by the demand and supply of market economy， but it is controlled by the central bank. Therefore， generally， the deposit interest of central bank is around 3%， and loan interest is around 6%. But， from 2000， by the rate of increase of GDP 8% each year， the scale of shadow banking has grown because of rising demand for fund. Although the shadow banking has the （+） aspect that it matches the need for fund of the companies of local governments， it can approve the loan to the company that has low credit， high risk venture companies， local governments， basic constructions， and investing to social infrastructure（Ex， high way， railway， bridge） that has long term payback period for the high profit. In this case， if the problem happens on the invested equity， the commercial bank faces the risk of “maturity mismatch” of deposit and loan period， and it can cause the liquidity risk.

Therefore， to sum up this correlation， the default of local governments debt-> outbreak of shadow banking -> degeneration of profitability of commercial bank-> increased liquidity risk of commercial bank.

【作者簡介】

尹亨斌，男，沈陽人，經濟學博士，韓國水原大學教授，研究方向：金融風險。