Bank run in China as depositors move funds to underground banks offering 36% p.a.

[touchring]

http://www.thestandard.com.hk/news_d...=20110923&fc=7

Depositors take to loan-sharking

Friday, September 23, 2011

The mainland's four largest banks have been hammered by a big outflow of deposits that are ending up in private lending markets, the state-run China Securities Journal reported yesterday.

In the first 15 days of September, combined deposits at the big four plunged by 420 billion yuan (HK$512.7 billion) from the end of August.

Bank of China (3988) saw a drop of 180 billion yuan, while deposits at the Agricultural Bank of China (1288) fell by 140 billion yuan, the paper reported. No figures were given for ICBC (1398) or China Construction Bank (0939).

The sharp decline in deposits slowed down banks' lending. New loans given by the big four amounted to only 87 billion yuan in the first half of September, versus 186.7 billion yuan for August.

"Amid high inflation and real negative real interest rate, clients prefer withdrawing their money out of the banks for loan-shark lending," said Hu Yu, a Shenzhen-based analyst with Chinalion Securities.

Deposit rate in underground lending businesses in Wenzhou, Dongguan and Fuzhou are said have hit 36 percent a year - 10 times the benchmark one-year deposit rate of 3.5 percent.

Even state-owned firms such as China Mobile (0941) have set up a financial arm to venture into the loans business, while PetroChina (0857) already has a number of financial vehicles in place. Meanwhile, local fund manager Value Partners (0806) and jewelry retailer Man Sang International (0938) have started a microcredit business in the mainland. NATALLIE CAI

[sgominator]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

Even state-owned firms such as China Mobile (0941) have set up a financial arm
PetroChina (0857) already has a number of financial vehicles in place.
Value Partners (0806) and jewelry retailer Man Sang International (0938) have started a microcredit business in the mainland.

Aren't these clear symptoms of the final stages of a financial bubble?
Everyone and his dog opening a financial department?
GMAC anyone?

[GRG55]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

Aren't these clear symptoms of the final stages of a financial bubble?
Everyone and his dog opening a financial department?
GMAC anyone?

It does seem to show a subtle shift. I suspect that not long ago this private capital would have gone into direct property speculation. Now that it is going into the "black credit" market - and then into property? - is interesting. Suggests that funding for the late comers into the real estate speculation game is alive and well. As the real estate markets in China become saturated don't they have to keep finding a way to create new classes of ever less credit worthy buyers, to keep the game going. So much for China property being a "cash" market. This sounds like sub-prime, with Chinese characteristics...

[sgominator]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

This sounds like sub-prime, with Chinese characteristics...

But i'm sure it's "well contained"

[touchring]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

So much for China property being a "cash" market. This sounds like sub-prime, with Chinese characteristics...

It probably started off with cash, but cash alone cannot blow the bubble until it is as huge as today.

[Chris Coles]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

The real pity of it is the money could be used to create new businesses to manufacture all the products everyone uses in life; instead, it is just blowing the bubble even larger. A dreadful pity; they will pay a very heavy price in the end.

[lakedaemonian]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

It does seem to show a subtle shift. I suspect that not long ago this private capital would have gone into direct property speculation. Now that it is going into the "black credit" market - and then into property? - is interesting. Suggests that funding for the late comers into the real estate speculation game is alive and well. As the real estate markets in China become saturated don't they have to keep finding a way to create new classes of ever less credit worthy buyers, to keep the game going. So much for China property being a "cash" market. This sounds like sub-prime, with Chinese characteristics...

Agreed......

Being in business that offers finance...we usually find that most cash buyers are rarely if ever actually cash buyers......different market though.

Certainly sounds like warning indicators......

[mmr]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

I was under the impression that underinvestment in manufacturing production was not China's main problem (admittedly, much of what is produced with that investment is not intended for consumption in the domestic market).

[mmr]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

This appears to go far beyond the shadow banking in the US, where at least most of the non-bank lending was done by the largest industrial conglomerates (GE, the automakers, Caterpillar, etc.) The problem in China appears to extend to a much larger number of industrial companies.

China groups fuel growth of shadow banking

[A] growing number of Chinese companies using excess cash to fund indirectly the country’s shadow banking system as Beijing’s monetary tightening makes it more difficult for small and medium-sized firms to access the formal banking sector.

At the same time it allows the companies – some estimates say 90 per cent of the shadow lenders are state-owned – to make healthier returns than they could by leaving the cash on deposit.

“Everyone does it; they just don’t tell you,” says Vincent Chan, equity strategist for Credit Suisse in Hong Kong. “The difference with Yangzijiang is that they do it in the listed entity, not at the group or parent level.”

China Economic Daily, a state-run newspaper, reported that 64 listed non-financial companies had issued loans this year as of the end of August. It said that they had lent a total of $16.9bn, up 38.2 per cent from last year, according to stock market filings.

Of these companies, 35 lent at rates higher than the standard bank rate, with the highest at a 24.5 per cent annualised rate. The report added that at least nine out of ten companies engaged in lending were state-owned, such as China Railway Group and the property arm of China’s food giant Cofco.

That so many industrial companies, like Singapore-listed Yangzijiang, have turned themselves into quasi-financiers is a symptom of the economic distortions in China. The country’s regulated interest rates mean that borrowers in the official sector can obtain money at artificially low rates while less favoured borrowers have to pay far higher rates in the grey market.

The problem has become more acute since the banks were instructed by the government to rein in credit after a lending explosion over the last two years that had fuelled growth but also inflation which increased to 6.5 per cent in August.

And the quote of the day:

Foreign firms with cash balances in China are contemplating similar operations, according to Jason Bedford of KPMG in Beijing who advises foreign multinationals, including German and Japanese conglomerates. “Many have a large build-up of yuan that can be difficult to repatriate,” he notes. “Sometimes these wealth management products can be very safe, though sometimes the rates of return don’t reflect the real risk.”

Of course not.

[touchring]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

This appears to go far beyond the shadow banking in the US, where at least most of the non-bank lending was done by the largest industrial conglomerates (GE, the automakers, Caterpillar, etc.) The problem in China appears to extend to a much larger number of industrial companies.
And the quote of the day:
Of course not.

Not just companies, even individuals, if you can lend out at 100% interest rate a year, every tom, dick or harry with even just $100 cash on hand will go into this "business".

Manufacturing companies with low margins will be greatly enticed. Assuming a SOE that makes $20 million profit a year has a credit line of $200 million from a state bank at an interest rate of 8% a year. The SOE only needs $100 million for operations, they can setup a finance business and lend out the other $100 million at 50% a year, a profit of $40 million a year! This business is even more profitable than their manufacturing business.

[Chris Coles]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

This business is even more profitable than their manufacturing business.

Reminds me of the same argument made by GM just before the credit crunch and they discovered that all their finance "Deals" were belly up.

[touchring]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

Found an article of the lending boom. This is more than just loan sharking, it's literally a ponzi.

http://www.telegraph.co.uk/news/worl...mid-fraud.html

'BMW town' crashes in pyramid fraud
For a short while, life in Shiji, a small crab–farming village in eastern China, seemed too good to be true.
Malcolm Moore

By Malcolm Moore, Shanghai

8:25AM BST 23 Sep 2011

For as long as anyone can remember, Shiji has been poor. The village is little more than a dusty grid of brick shacks and its residents live on an average of just 10,000 yuan (£1,000) a year.

But this spring, a miraculous transformation occurred. The locals suddenly noticed that they were rich.

"We have become a BMW town!" wrote one shocked villager on a local internet forum. "In our county, there are now 800 BMWs and 600 Mercedes, 500 Audis, 50 Porsches, 30 Jaguars, one Ferrari, one Lamborghini and one Maserati," he added.

A forest of cranes had also sprung up around the village, constructing large apartment blocks which advertised themselves with pictures of English butlers and sumptuous, chandelier–lit dining rooms.

Miracles abound in modern China, where countless families have become fabulously wealthy in a single generation. But the dramatic change in Shiji's fortunes raised eyebrows.

Chinese journalists soon arrived to count the number of BMWs on the roads (10 in 13 minutes, according to CCTV, the state broadcaster).

Then they started asking questions about where the money had come from.

Earlier this month, Shiji's boom ended as abruptly as it began.

The local Dragon Court BMW dealership has been shuttered; its owner is under house arrest. And as The Daily Telegraph arrived to investigate, jittery local officials were quick to detain us.

"It is not worth looking into too deeply," cautioned one of them, loading us into the back of a black sedan.

What happened in Shiji is a fraud that plays out every day in some corner of China's murky economy, as local Communist Party officials and greedy entrepreneurs collude in vast pyramid schemes.

"It all began when a man named Shi Guobao returned to Shiji after working in Beijing," said Zhu Yi, the head official in the village.

"He became a property developer, but he wanted to make a bigger fortune so he decided to also become a loan shark." Together with 17 of his friends, Shi began tapping the villagers for their savings, promising to pay them 10 per cent interest each month.

The gang quickly raised 350million yuan, (£35.5million) which they then lent out at rates of 30 per cent or more each month to borrowers including local property developers. Shi became known as "King Claw", the man at the head of the pyramid.

For a while, the scheme worked well. Other property developers borrowed from Shi in order to begin construction and the local government, which earned income from every acre sold to the developers, also prospered.

During the boom, the villagers reported fireworks being lit in celebration almost every night.

The owner of the BMW dealership, Zhang Shanyuan, flooded the streets of Shiji with cars when his friends came to celebrate the birth of his son.

But there was little demand in the end for the huge apartment blocks, which today stand empty and half–finished. And when the borrowers started defaulting on King Claw's loans, the pyramid collapsed. Around 1,700 villagers have complained to the police, some having lost their entire life savings. Two villagers were killed in a mysterious car crash after trying to reclaim their money from one of the loan sharks.

Today, the only luxurious cars left are parked outside the local county government offices and Shi and his 17 friends are either in prison or under house arrest.

"I am not sure if any government offi–cials were involved. As far as I know, no local government officials have any luxury cars. The cars outside the government offices must belong to other people. And there were only 152 BMWs registered in the county," said Mr Zhu, who escorted us 200 miles away to Nanjing before releasing us so that we could not pry any further.

[shiny!]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

Not just companies, even individuals, if you can lend out at 100% interest rate a year, every tom, dick or harry with even just $100 cash on hand will go into this "business".

Manufacturing companies with low margins will be greatly enticed. Assuming a SOE that makes $20 million profit a year has a credit line of $200 million from a state bank at an interest rate of 8% a year. The SOE only needs $100 million for operations, they can setup a finance business and lend out the other $100 million at 50% a year, a profit of $40 million a year! This business is even more profitable than their manufacturing business.

Chris, you beat me to it! Sounds like GM. And we know how well that turned out.

[touchring]

Re: Bank run in China as depositors move funds to underground banks offering 36% p.a.

Reminds me of the same argument made by GM just before the credit crunch and they discovered that all their finance "Deals" were belly up.

Yea, but GM still has got the collateral to repossess?