China’s shadow banks: The credit kulaks
The growth in wealth-management products reflects deeper financial distortions
Jun 1st 2013 | HONG KONG |From the print edition
AS THE grandson of a “rich farmer”, a stigmatised class in communist China, Joe Zhang grew up on the wrong side of the ideological tracks. At school he envied the town-kids who could look forward to a cushy job minding grain-stores or writing propaganda. But after winning a spot at university, he eventually escaped into central banking in Beijing and, later, investment banking in Hong Kong. By pleading, petitioning and playing a lot of ping pong (a sport he hates) he was even admitted into the Communist Party in 1985.
Then, in 2011, his social climb suffered an abrupt reversal. He took on a role that remains stigmatised and discriminated against in today’s China: he became a shadow banker. His new book, “Inside China’s Shadow Banking: the Next Subprime Crisis?”, recounts his trials as the head of a microlender in Guangdong. Elsewhere in the world, microcredit is a respectable, even canonised, endeavour. In China, Mr Zhang complains in his book, it is “only slightly more respectable than perhaps massage parlours or nightclubs.”
He describes the variety of institutions and instruments that operate and innovate in the shadow of China’s mammoth banks, where they are hard for the authorities to see. They include the informal lenders, kerbside capitalists and back-alley bankers for which China is famous. But the most important institutions are China’s 67 trust companies, lightly regulated finance firms that make loans and other investments but cannot collect deposits. And the most significant instruments are the uncountable wealth-management products (WMPs), which raise money from better-off investors, in large increments (at least 50,000 yuan, about $8,160) and for short periods (typically less than six months, sometimes much less). Read more of this post
