Officials in China are worried that it has become too easy to get credit there, fueling what might be a speculative bubble. Some Chinese lenders have used borrowing between banks as a disguise for some of their riskier ventures. But interbank lending is a bedrock part of the legitimate financial system and some foreign banks are feeling caught up in China’s crackdown.
The issue for China is the degree to which it happens and how much of it is in the murky world of the shadow banking system. The Chinese government is worried off-balance-sheet lending may be fueling bubbles in certain areas of their marketplace — in particular, land prices and property prices.
Some foreign banks are involved in these off-balance-sheet lending activities. The difficulty is a lot of these non-bank institutions that are involved in shadow banking — such as hedge funds — can end up taking large risks. And that’s what the Chinese government is worried about. Foreign banks could then get involved because they’re used to dealing with those kinds of things.
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