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Don’t Downplay the Risks in China’s Banking System: Eurasia Group’s Consonery

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China’s second quarter GDP report shows that growth slowed to 7.5% from 7.7% in the first quarter.

This slowdown buoyed global markets. European and Asian stock markets gained between 0.5 and 1% on the news, relieved that the number wasn’t as weak as many had feared, and U.S. markets were poised to open higher.

Nicholas Consonery, senior analyst at Eurasia Group, says the news from China is positive because it shows the government is willing to stomach slower growth in order to reform the economy in ways to foster more sustainable growth.

China’s new leaders want the world’s second largest economy to rely less on government investment and exports and more on domestic consumption. To that point, the People’s Bank of China recently withheld cash from China’s interbank market to moderate the credit growth and reliance on a shadow banking system

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The government feared easy credit was feeding speculation in real estate and other markets. The central bank’s move created a cash squeeze for Chinese banks, sending short-term rates sharply higher, at which point the central bank moderated its move and rates subsequently fell.

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“The People’s Bank of China determined it wanted to motivate them [commerical banks] to not engage in some of the risky lending practices that they’ve really been engaging in more aggressively over the past 5-6 months. “ says Consonery.

What sector of the Chinese economy does Consonery think we should be paying close attention to? Watch the video above to find out!

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