China Global Financial Crisis Case Study

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China - the next source of global financial crisis? INTRODUCTION All the bubbles the world has seen, most of them started off having a legitimate purpose. To name a few, the Great Depression of the 1930’s was the outcome of mass production which led to the mismatch of supply and demand. The dot-com bubble of early 2000 was because of the booming IT sector throughout and the 2008 Recession was the outcome of the “American Dream” which led to the booming and bursting of the housing bubble. The continuous cycle of recessions and progressions is the way the world economies behave. Soon after the recession, like most of the economies, China’s trade links was hit by the slowdown of the US economy. This led to the fall of the Chinese GDP. Hence, China launched a major liquidity infusion program of almost $600 billion. Hence, the country went to formulate and…show more content…
These shadow banks are involved in lending money to the people at a favourable rate (sometimes more than 20%) and are not regulated by the regulatory bodies of the country. It consists of risky lending products consisting of derivatives and securities lending. Since these banks don’t come under the regular banking system the Government is not able to control the liquidity flow that is happening because of these banks. In China the interest rates are set by the banks and not by the market forces. They possess a systematic risk for the economy and in case of China that would impact the whole world. Shadow banking with time has become a very important part of the Chinese Banking Industry. The recent problem that’s brewing in the economy is the concept of “entrusted loans” which is the process of lending of loans between two parties but the arrangement is to be done by a regular bank. The WSJ says that a whopping 1.4 trillion Yuan ($220 billion) was issued by the China Construction Bank (CCB) in outstanding entrusted loans by the end of
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