China's wealthy bypass the banks

[Tyler Durden]

Fascinating. And typical of the unusual Chinese seesaw that has occurred 
throuout the aeons between hyper-strict centralized control and something 
approaching a lite version of anarchy. There's no good mapping of this into 
Western ideas of fascism, marxism, and economics.

Interesting too that there's a ganster base in Wenzhou. This is precisely 
where the young Chiang Kai Shek consolidated his power early on as a local 
gangster/warlord.

-TD



>From: "R.A. Hettinga" <rah at shipwright.com>
>To: cypherpunks at al-qaeda.net
>Subject: China's wealthy bypass the banks
>Date: Tue, 9 Nov 2004 16:10:52 -0500
>
><http://www.iht.com/bin/print_ipub.php?file=/articles/2004/11/09/business/yuan.html>
>
>
>
>
>
>China's wealthy bypass the banks
>
>By Keith Bradsher The New York Times
>  Wednesday, November 10, 2004
>
>
>WENZHOU, China  The Wenzhou "stir-fry" is not a dish you eat. But it is
>giving indigestion to Chinese regulators and could prove troublesome to
>many investors worldwide, from New York money managers, Pennsylvania
>steelworkers and Midwestern farmers to Australian miners.
>
>  Here in this freewheeling city at the forefront of capitalism in China,
>the dish is prepared when a group of wealthy friends pool millions of
>dollars' worth of Chinese yuan and put them into a hot investment like
>Shanghai real estate, where they are stirred and flipped for a hefty
>profit. The friends often lend each other large amounts on the strength of
>a handshake and a handwritten IOU.
>
>  Both sides then go to an automated teller machine or bank branch to
>transfer the money, which is then withdrawn from the bank. Or sometimes
>they do it the old-fashioned way: exchanging burlap sacks stuffed with 
>cash.
>
>  The worry for Chinese regulators is that everyone in China will start
>cooking the Wenzhou stir-fry and do it outside the banking system.
>
>  In the last few months, borrowing and lending across the rest of China is
>looking more and more like what is taking place in Wenzhou. The growth of
>this shadow banking system poses a stiff challenge to China's state-owned
>banks, already burdened with bad debt, and makes it harder for the nation's
>leaders to steer a fast-growing economy.
>
>  The problem starts with China's low interest rates. More and more 
>families
>with savings have been snubbing 2 percent interest on bank deposits for the
>double-digit returns from lending large amounts on their own.
>
>  They lend to real estate speculators or to small businesses without the
>political connections to obtain loans from the banks.
>
>  Not only is the informal lending rate higher, but the income from that
>lending, because it is semilegal at best, is not taxed. For fear of shame,
>ostracism and the occasional threat from thugs, borrowers are more likely
>to pay back these loans than those from the big banks.
>
>  Tao Dong, chief China economist at Credit Suisse First Boston, calculates
>that Chinese citizens withdrew $12 billion to $17 billion from their bank
>deposits in August and September.
>
>  The outflow turned into a flood last month, reaching an estimated $120
>billion, or more than 3 percent of all deposits at the country's financial
>institutions.
>
>  If the bank withdrawals are not stemmed in the months ahead, Tao warned,
>"this potentially could be a huge risk for financial stability and even
>social stability."
>
>  And with China now accounting for more than a quarter of the world's 
>steel
>production and nearly a fifth of soybean production, as well as some of the
>largest initial public offerings of stock, any shaking of financial
>confidence here could ripple quickly through markets in the United States
>and elsewhere.
>
>  For instance, if the steel girders now being lifted into place by 
>hundreds
>of tower cranes in big cities across China are no longer needed, that would
>produce a worldwide glut of steel and push down prices.
>
>  On Oct. 28, when China's central bank raised interest rates for one-year
>loans and deposits by a little more than a quarter of a percentage point,
>it cited a need to keep money in the banking system. Higher official rates
>should "reduce external cycling of credit funds," the bank said in a
>statement.
>
>  Eswar Prasad, the chief of the China division of the International
>Monetary Fund, expressed concern about bank withdrawals in a speech in Hong
>Kong three days before the central bank acted.
>
>  The main Chinese banks have fairly substantial reserves, but they need
>those reserves to cover huge write-offs of bad debts some day.
>
>  The hub of informal lending in China is here in Wenzhou, 370 kilometers,
>or 230 miles, south of Shanghai. Some of China's first experiments with the
>free market began here in the late 1970s, and the result has been a
>flourishing economy together with sometimes questionable business dealings.
>
>  Depending on how raw they like their capitalism, people elsewhere in 
>China
>describe Wenzhou as either a center of financial innovation or a den of
>loan sharks. But increasingly, Wenzhou is also a microcosm of the kind of
>large-scale yet informal financial dealings now going on across the 
>country.
>
>  The withdrawals by depositors and the informal money lending has spread 
>so
>swiftly here that it is only in Wenzhou that the Chinese central bank
>releases monthly statistics on average rates for direct loans between
>individuals or companies. The rate hovered at 1 percent a month for years
>until April, when the authorities began limiting the volume of bank loans.
>
>  Borrowers default on nearly half the loans issued by the state-owned
>banks, but seldom do so here on money that is usually borrowed from
>relatives, neighbors or people in the same industry.
>
>  Residents insist that the risk of ostracism for failing to repay a loan 
>is
>penalty enough to ensure repayment of most loans.
>
>  Although judges have ruled that handwritten IOUs are legally binding,
>creditors seldom go to court to collect. "If it is a really good friend, I
>would lose face if I sued them in court," said Tu Shangyun, the owner of a
>local copper smelter and a part-time "silver bearer," a broker who puts
>lenders and borrowers in touch with each other, "and if it weren't a good
>friend, I wouldn't lend the money in the first place."
>
>
>
>  Violence is extremely rare, but the threat of it does exist as the
>ultimate guarantor that people make every effort to repay debts.
>
>  "Someone can hire a killer who will chase you down, beat you up and maybe
>even kill you," said Ma Jinlong, who oversaw market-driven financial
>changes in the 1990s in Wenzhou as director of the municipal economic
>reform committee and is now an economics professor at Wenzhou University.
>
>  An austerity policy was invoked, its goal to slow rapid economic growth 
>in
>the hope of stopping a spiral in the inflation rate. With consumer prices
>rising at 5.2 percent a year despite price controls on many goods and
>services, and with less-regulated prices for goods traded between companies
>climbing nearly twice as fast, people lose buying power while their money
>is on deposit at a bank.
>
>  The interest rate for informal loans jumped last spring to 1.2 percent a
>month, or 15.4 percent compounded over a year, and has stayed there ever
>since. According to the nation's central bank, total bank deposits in
>Wenzhou have been dropping by $250 million a month since April as companies
>and individuals withdraw money, either because they can no longer obtain
>bank loans for their investments or because they want to lend the money at
>higher rates to each other.
>
>  For lenders, these interest rates are much more attractive than earning a
>meager 2.25 percent a year, even after the recent rate increase, on a
>deposit at a government-owned bank. And while Beijing assesses a 20 percent
>tax on all interest from bank deposits, nobody pays tax on the income they
>receive from lending money on their own, Ma said.
>
>  Most informal loans have traditionally gone to relatives or neighbors to
>finance the starting of small local businesses. Wenzhou is now one of the
>world's largest producers of no-brand sunglasses; Dong Ganming, the owner
>of a 350-employee sunglasses factory here, said that his plant was just one
>of almost 1,000 here involved in making glasses.
>
>  Fierce competition has prompted local residents to borrow money to 
>exploit
>every possible niche in the industry, with some factories making nothing
>but bridges for sunglasses so that they will not slide down customers'
>noses, other factories making only the lenses, and so forth. Any government
>crackdown on informal loans would carry the risk of stifling highly
>efficient small and medium-size businesses that have little hope of
>obtaining loans from the state-owned banks, which still allocate credit
>based partly on political connections.
>
>  Dong said that loans from friends and family allowed him to start his
>sunglasses company with 10 employees a decade ago; he quickly paid off the
>loans and has been reinvesting most of the profits ever since, putting very
>little into bank deposits. "The interest in the bank is very low," he said.
>"If you invest the money, you can get much more money."
>
>  But more recently, residents here say, a lot of money has been flowing
>into real estate here and in other big cities, especially Shanghai, helping
>to fuel double-digit increases in interest rates.
>
>  Deals increasingly involve people who have no family or neighborhood
>connection, raising the risk of disputes.
>
>  Kellee Tsai, a specialist in Chinese informal banking at Johns Hopkins
>University in the United States, said that many overseas emigrants from
>Wenzhou had also been sending their savings back here to be lent at much
>higher rates than are available in the countries they have moved to.
>
>  Some local investors have been able to pay for their investments with
>profits from businesses here, like Chen Shen, the owner of four shops that
>sell shoe-manufacturing equipment to the hundreds of shoe factories that
>have popped up in this area. She said she paid cash for an apartment near
>Shanghai's Bund, its riverfront district, that had appreciated as much as
>60 percent in less than two years.
>
>
>
>  Still, Chinese regulators do not like the practice, and officials have
>been trying to stamp out such operations with limited success.
>
>  They have outlawed the practice of pooling savings into various kinds of
>informal banks that make loans for real estate and other investments:
>Organizers are subject to the death penalty but are rarely caught unless
>the informal banks collapse.
>
>  Oriental Outlook, a Chinese current affairs magazine, reported late last
>month on the trial of a man accused of operating an illegal bank northeast
>of here that collapsed a year ago, leading to the filing of more than 200
>civil lawsuits. Another man who lost money in the scheme and went bankrupt
>as a result assaulted the defendant outside the courtroom, the magazine
>said.
>
>  The extent of such pooling is unclear. But it poses the greatest risks of
>damage to financial confidence if bank runs occur at these informal
>institutions, economists agree. Bank runs, with depositors lined up
>clamoring for their money back, have been an occasional problem around
>China for years, but are always quickly contained as the authorities rush
>to distribute as much cash as necessary.
>
>  "The policy with bank runs, even with illegal banks in some cases, has
>been to flood the bank with liquidity and pay everyone off," said Michael
>Pettis, a finance professor at Beijing University, who criticized as ill
>advised the Chinese policy of bailing out even illegal banks.
>
>  "One of the most salutary ways to let people know not to put money in
>these is to let two or three go bankrupt."
>
>--
>-----------------
>R. A. Hettinga <mailto: rah at ibuc.com>
>The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
>44 Farquhar Street, Boston, MA 02131 USA
>"... however it may deserve respect for its usefulness and antiquity,
>[predicting the end of the world] has not been found agreeable to
>experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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