Beijing, which has wielded financial control as a key tool of Communist party power, now finds itself largely at the mercy of an unregulated collection of trust companies, private banks, kerb lenders and loan sharks.
While the trust companies, the largest and most established segment of the shadow system, are mostly registered businesses with established offices, the multitude of “underground” operators exist in a netherworld of suitcase accounts and unsecured loans. Their colourful advertisements can be found on the back pages of city newspapers, often listing only a single mobile phone number next to alluring names such as “Easy Heaven Investments”, “Profits Quick” and “Treasure Beautiful Gold Credit”.
Suitcase accounts; newspaper classified ads; mobile phone numbers with no physical presence; unsecured investments with implausibly high yields… these “underground banks” sound more like Ponzi schemes. (Except for “Easy Heaven”, which sounds more like an insalubrious bar in Orchard Towers.)
In fact, I’m gonna go out on a limb and say that there are probably a significant number of Ponzi schemes running alongside these trusts and underground banks. How are you supposed to tell the difference between an underground bank – one bloke with a mobile phone running an unregistered financial operation promising 10-to-50% returns – and a Ponzi schemer?
More to the point… how can China’s banks tell the difference?
[…] Indeed, it is a telling insight into the atrophied condition of the state-regulated financial system that the most profitable activity by state-owned banks in the first half of this year was not lending to businesses but funding trusts and underground banks, bank financial reports show.
I don’t think they can. Chinese banks have been ordered to lend, so lend they will – and damn the consequences.
I’d love to know how China’s banks think they’re going to collect on these loans to the underground banking sector (and even to the notionally more transparent trust sector). And I think that when the crunch comes, we’re going to find that a lot of Chinese banks have made a lot of very stupid – and very uncollectable – bad loans.