China's Quest for Capital: Motivations, Methods, and Implications - Weaknesses, Lack of Transparency in Financial Systems, Banking, Risk of Toxic Debt Crisis, Shadow Lending, Credit Surges, Stimulus Efforts

This January 2020 hearing of the U.S.- China Economic and Security Review Commission examined the internal and external dynamics of China's financial system and the risks as well as opportunities of China's growing global integration poses to U.S. institutional and individual investors. Contents: Opening Statements * Administration Panel: Administration Views on U.S. Investor Exposure to China's Financial Markets * Panel I: China's Capital Requirements and Systemic Challenges * Panel II: How Chinese Entities Raise Capital * Panel III: U.S. Exposure to China's Financial Markets.

With stage one of the trade deal inked, China has committed to greater access to its banking, asset management, credit, and financial markets. At the same time, China's securities are being included in global indices. This expansion in access raises reasonable concerns about the transparency, stability, regulation, and real value associated with China's market access and lending instruments. To fuel growth over the past decade, China's banking sector has grown from $9 trillion to a staggering $39 trillion, and 8.2 to 21 percent of which is estimated by Moody's to be held in shadow lending instruments. Meanwhile, China's debt-to-GDP ratio exceeds 260 percent. The speed, scope, and lack of transparency regarding this increase are troubling as China seeks closer integration with U.S. and global financial markets. Despite a four-fold expansion over the past decade, China's financial system is marked by weaknesses, inefficiencies, and a lack of transparency, which challenge an accurate understanding of capital requirements, debt levels pricing, and treatment of bank balance sheets, volume of non-performing assets, and general operations. High savings rates historically have reduced concerns about excess debt, however, in the last several years the flow of credit has far exceeded deposits. Beijing seemed to recognize the risks of excessive corporate debt, but abandoned de-leveraging as growth slowed. A renewed surge in shadow banking practices add challenges for small and medium enterprises in raising capital.

Opening Statement of Chairman Cleveland (Hearing Co-Chair) * Opening Statement of Commissioner Wessel (Hearing Co-Chair) * Administration Panel: Administration Views on U.S. Investor Exposure to China's Financial Markets * Nazak Nikakhtar, Assistant Secretary for Industry and Analysis, U.S. Department of Commerce, International Trade Administration * Panel I: China's Capital Requirements and Systemic Challenges * Dinny McMahon, Author, China's Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle * Leland Miller, CEO, China Beige Book * Zhiguo He, Fuji Bank and Heller Professor of Finance, University of Chicago Booth School of Business * Panel II: How Chinese Entities Raise Capital * Carl Walter, Independent consultant; author, Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise * Gabriel Wildau, Senior Vice President, Teneo * Brian McCarthy, Chief Strategist, Macrolens * Panel III: U.S. Exposure to China's Financial Markets * Andy Rothman, Investment Strategist, Matthews Asia * Derek Scissors, Resident Scholar, American Enterprise Institute * David Loevinger, Managing Director, Emerging Markets Group, TCW *

This compilation includes a reproduction of the 2019 Worldwide Threat Assessment of the U.S. Intelligence Community.

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