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Alternative Market Briefing

Chinese shadow banking concerns expand

Monday, February 03, 2014

Bailey McCann, Opalesque New York:

The size and scope of shadow banking activities in China is steadily increasing, raising some concerns about the overall stability of the system. The impact of bad debts in China’s shadow banking system is likely more important to the global economy than Fed policy, according to the latest research from Nikko Asset Management. Several property trusts have already defaulted, but with rising land prices and generous credit, these have managed to be "worked out." Recent defaults in the mining and industrial sectors with questionable collateral will likely have more serious repercussions, however.

The relationship between the supply of iron ore and steel consumption in China - one of the biggest commodity stories in recent years is also tied up in shadow banking. Report findings show that iron ore is expected to fall in price from its current price level of around $130 per ton towards $110-$120 per ton by 2018, as a result of increased supply from Australia and Brazil. As a key component in steel products, demand for iron ore has surged as a result of China’s ongoing urbanisation process. The inability of iron ore producers to increase supply incrementally has led to a quadrupling of the iron ore price over the past 10 years.

One of the biggest suppliers - Vale is on the verge of losing its title as the largest exporter of iron ore to Rio Tinto because of inconsistency in supply. Report authors suggest that this could happen within ......................

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