A significant portion of shadow banking has been directed to providing credit to particularly speculative sectors, such as real estate, and the Chinese construction sector alone has accumulated $ 3.5 trillion in debt as of mid-2018, up two and a quarter times its debt level only four years ago, , One of Asia’s largest investment banks.
The most booming real estate market in the world
This credit to real estate has created the world’s booming real estate market. About 25 percent of China’s GDP comes from the real estate sector, and 80 percent of the national wealth, about $ 65 trillion, is the real estate holdings of the real estate market. Protection against the decline in purchasing power of the Chinese currency, the yuan, over the years.
When American buyers sent printed dollars to China for cheap televisions and jeans, the Chinese government had two options. The first was to send the importers to replace the dollars on the free market and then to cause a sharp rise in the yuan’s exchange rate, ie, the yuan would increase in view of the rising demand. Such an increase in the yuan rate would, of course, completely disrupt the export machine, which was based on low and attractive local prices.
The second option was to buy the dollars from exporters who needed yuan to cover their domestic expenses in China, using money printed by the Chinese central bank, thereby reducing the purchasing power of the local currency because of the increase in its volume.
The Chinese government, of course, chose the second option. Thus, in 1978, the total money in China (M2, which includes cash and deposits and liquid savings) stood at some 116 billion yuan, at the end of 2018 the total was about 180 trillion yuan, an increase of more than 1,500. And a great deal of it was directed to the real estate sector.