Crisis In China

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,

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

The home currency was devalued to a stable limit so that the economy doesn’t face a macroeconomic issue like inflation. Also a devalued currency helps in China’s trade aspect. This attracts the foreign countries since they get to buy the goods at a cheap rate. But with the changing markets and international markets the currency is regulated by the market forces partially which shows that the country might adopt the concept of Flexible Currency System in the near future. Since 2006 the Remninbi has been allowed to float in the narrow margin and since then the government has been gradually increasing the flexibility of the