When The Bank Sees Its Shadow

Bloomberg: China's Best Bank Called 'Mirage' of Shadow Lending
The best-performing bank in China is in a struggling city in the northeast where weeds sprout alongside the concrete skeletons of high rises in an industrial zone that mostly looks like a ghost town.

Steel plants have laid off tens of thousands of workers. Cranes stand idle on construction sites. Wipe away a spiderweb on a dirty glass door at an empty complex with smashed windows and there’s a notice from the local government demanding rent unpaid since November 2014.

Yet the Bank of Tangshan’s financial statements hardly reflect these realities. Instead, this small lender reports the fastest growth of 156 Chinese financial institutions and the lowest level of bad loans, a mere 0.06 percent. Its profit jumped 436 percent in two years and assets soared almost 400 percent since the start of 2014 to 177.9 billion yuan ($26.7 billion).

It’s largely driven by shadow lending.
The bank has little concern of being forced into bankruptcy:
Located in Hebei, one of China’s five worst-performing provincial economies, the Bank of Tangshan has been increasingly concentrating lending in Caofeidian, the site of an almost deserted industrial zone. The zone sits on more than 200 square kilometers (77 square miles) of land reclaimed from the sea, about an hour’s drive south of the center of Tangshan city and sharing the coast of the Bohai Sea with Tianjin.

As of the end of last year, 59 percent of the bank’s on- and off-book lending was there, according to its annual report. Four of the firm’s 10 largest shareholders are government-backed companies in Caofeidian.
Loans are the deposits, but the shadow banks don't even need to worry about creating deposits. The loan is its own asset. The credit limit is theoretically infinity, but in reality constrained by the borrowers. When the limit is finally reached, deflationary collapse begins. Or the central bank monetizes outstanding credit and increases base money to support the system.

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