Thursday, September 13, 2012

Shadow Banking Blues in China

In the first six months of the year 58,000 private lending lawsuits filed in Zhejiang province (where Wenzhou is)
involving 28.4 billion yuan in private lending ($4.5 billion USD)
up 27% from 2011
highest in 5 years
600,000 lawsuits filed nationwide in 2011
valued at 110 billion yuan ($17 billion USD)
up 38% from 2010
376,000 filings nationwide first six months of 2012
up 25% from 2011
depositors seeking better returns withdrew 500.6 billion yuan ($79 billion USD) from banks in July
or 0.6 percent of total deposits.
30% of funds in Wenzhou's shadow system went to SMEs
60% went into real estate speculation and re-lending

You've probably heard the joke about the German tourist who puts a $100 bill on the front desk of the hotel and goes to look at a room. (The hotel pays the cook the cook pays the butcher the butcher pays the hooker the hooker pays the hotel and the German gets his money back when he decides not to stay.) It's an example of what it takes to unwind the tangled credit of an informal banking system where by some miracle everyone is made whole.

(Wall Street with its derivatives has become a giant informal system, one of the reasons it crashes rather than unwinds. But that's another topic.)

China's (no reserve) shadow banking system is in the middle of a great unwind. But given the chaotic nature of it, there is no feasible way to run a $100 bill through it to make everyone whole.

Shadow Bankers Vanishing Leave China Victims Seeing Scams
To live out his retirement years, He Zhongkui was counting on steady income from an investment that promised interest payments five times higher than what he could earn in a Chinese bank.
The Chinese are savers. The Chinese are savers. We hear that repeatedly in arguments against a crash. The proponents of this argument never seem to take the next step and explain what they are invested in. They are invested in their children's inflated houses and in schemes like this.
Now He, a 62-year-old former municipal official in Wenzhou who rides a rusty bicycle, is cutting back on food and gasoline, having found himself one of a growing number of victims of China’s nebulous world of shadow banking. A “friend,” who he said had been paying him 2,400 yuan ($379) a month after He gave him one-third of his 600,000-yuan life savings to invest in real estate, suddenly disappeared. So did the payments and principal.
China’s slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments.
Chasing yield. Well, we can all feel for this guy.
“It’s time for payback for the unchecked growth of China’s shadow-banking activity,” said Yao Wei, a Hong Kong-based economist at Societe Generale SA, who estimates that as much as 2 trillion yuan of underground lending may default eventually. “The risks are culminating, and part of the system is doomed to collapse. On the flip side, this gives policy makers an opportunity to put in place oversight for a sector that should have been regulated a long time ago.”
Private lending between Chinese individuals is believed to be worth $1.3 trillion, according to Boston-based research firm IHS Global Insight (IHS), the equivalent of the 2011 U.S. federal budget deficit. Interest rates can reach as high as 100 percent.
In the heady days of blockbuster growth, maybe one's business could carry that kind of load. Maybe. The ones who couldn't rolled the debt, if they could.
The lending is part of a shadow-banking system that also includes the off-balance-sheet business of banks and trust companies and totals as much as $2.4 trillion, about one-third of China’s official loan market, according to estimates by Societe Generale. Shadow banking is prevalent in China because more than 90 percent of the nation’s 42 million small businesses are unable to get bank loans, while such investments offer returns at least several times higher than deposits.
The numbers just keep getting worse.
Another Wenzhou shadow-banking victim, Mao Renye, said he took out a 700,000 yuan bank loan last year at 10.8 percent annual interest, using his home as collateral, to help his son’s struggling clothing business. Enticed by a 36 percent interest rate promised by a city resident who ran a nationwide pharmacy chain, the 69-year-old former farmer-turned-businessman said he invested 550,000 yuan, only to find that the borrower’s company was on the brink of bankruptcy and dozens of creditors were chasing him for repayment. Mao didn’t get any money back.
The nightmare didn’t end there. As his bank loan matured in October, Mao had to borrow from friends, relatives and loan sharks to pay back the debt so his home wouldn’t be seized. Now he’s seeking to sell his 2 million-yuan home to pay off his borrowings. No buyer has shown interest, he said.
In Erdos, about 150 kilometers (93 miles) south of Baotou, 80 percent of housing-construction projects are halted after home prices tumbled to 3,000 yuan per square meter from a record 20,000 yuan per square meter, Caijing magazine reported Sept. 3. The biggest source of funds was private lending, and as defaults surged this year people began greeting each other by asking how much savings they were able to retrieve from their shadow- banking investments, the report said.
It goes on, read the rest

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