In the event of a shock to China’s economy, problems are likely to emanate from a set of small banks with poor financials and a loan book exposure to China’s weakest provincial economies.
In the wake of the global financial crisis, China saw an explosion not only in the level of debt in the economy, but also in the development of complex and opaque shadow banking structures.
The existing market narrative claims that an implicit economy-wide government backstop, coupled with ample foreign exchange reserves, are sufficient to contain any potentially rapid deleveraging of the Chinese financial system.
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