(Photo :Uichiro Niwa )

Recently, Uichiro Niwa, the former Japanese ambassador to China published an article on "Japanese economic news". In the article, Uichiro Niwa said the People's Bank of China broke its silence on shadow banking. It indicated that Chinese government is ready to tighten monetary policy if necessary, in order to keep economic bubble within limits. But in Uichiro Niwa's view, he said the arrival of Chinese bubble economy was unavoidable, and shadow banking problems was just a beginning of Chinese bubble economy.

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There are two reasons to support Niwa's point. Firstly, Chinese government is trying to step into urbanism. Secondly, RMB appreciation is at high pressure now. In order to narrow the gap between urban and rural areas in China, and to ensure the supply of labor, Chinese government aims to increase its urbanization rate from 52% to 60% by the year of 2020. It means there will be more than 14 million people from rural to urban areas every year. If such a rigid demand exists in Chinese real estate market, the overheated real estate development will be difficult to stop simply.

Besides, RMB exchange rate will rise inevitably, regardless how Chinese government rejects. It will increase overseas investment funds to flow into China considerably. Chinese government is quite clear about this problem. Dealing with shadow banking system is just the first step for Chinese government to fight against bubble economy.

Generally speaking, shadow banking refers to the lending and borrowing (basic financial activities) that occur outside the traditional deposit and loan model; that is, anything other than putting money in the bank and occasionally borrowing for things like buying a house. In China, the structure of shadow banking is very different. There are both black market funds from Hong Kong and money pumped by China's state-owned banks secretly. What China should do first is to figure out the relationship between China's state-owned banks and shadow banking. Chinese government will encounter mischievous strong resistance in front of China's state-owned enterprises when facing the challenge from bubble economy.