The true confessions of a Chinese shadow banker

The true confessions of a Chinese shadow banker

Joe Zhang, Bloomberg News | 13/07/09 | Last Updated: 13/07/09 1:08 PM ET
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Between curbside lenders, microcredit institutions, pawnshops, trust loans, “wealth management products” from banks and other components, this murky and unregulated financial universe is now worth an estimated $5 trillion, challenging the dominance of the traditional banking sector.
Getty ImagesBetween curbside lenders, microcredit institutions, pawnshops, trust loans, “wealth management products” from banks and other components, this murky and unregulated financial universe is now worth an estimated $5 trillion, challenging the dominance of the traditional banking sector.

    Shadow banking has flourished in China for one simple reason: financial repression

In the fall of 2010, as deputy head of China investment banking at UBS AG, I spoke to a group of wealthy investors in Beijing about the outlook for Chinese stocks. A rumpled, 50-something man from Hangzhou named Wang Zhigang pulled me aside afterward and asked for my advice about investing. Until then, he had made his money through curbside lending, not stocks. But, he lamented, his returns had dropped from more than 30% a year to a mere 23%. He worried about his personal fortune, which he had built up from nothing to almost 3 billion yuan (about $445 million back then).

He hardly needed my advice, I told him. “With your performance, even Ba-Fei-Te should farm out some money for you to manage!” I said, referring to Warren Buffett’s name in Chinese.

    China’s shadow bankers are easy to demonize. Their methods are unorthodox, possibly even unsavory. They look like a disaster waiting to happen.

Intrigued, I flew to Hangzhou a few days later to find out how Wang had done so well. He drove me to the Haining Leather Market to meet some of his customers. They were merchants of leather shoes, handbags and accessories. Their network was wide and close-knit, and they sold products globally through traditional channels, as well as online.

Twenty years ago, these guys would have looked like small fish to a traditional bank. Even after their businesses had grown exponentially, they couldn’t supply the kind of collateral that banks demanded. Yet these merchants needed money, and they needed it fast. So they turned for help to “shadow” bankers, like Wang.

Shadow Portfolios

There has been a lot of talk lately about shadow banking in China. Between curbside lenders, microcredit institutions, pawnshops, trust loans, “wealth management products” from banks and other components, this murky and unregulated financial universe is now worth an estimated $5 trillion, challenging the dominance of the traditional banking sector. Such unrestrained growth naturally worries China’s central bank, which fears that a flood of bad shadow loans could prompt a financial meltdown similar to the U.S. subprime crisis in 2008. A liquidity squeeze in June, when the central bank allowed interbank lending rates to rise to as high as 20% before intervening, was widely interpreted as a warning to banks to clean up their shadow portfolios.

    The threat to China’s financial system is right there — out in the open — not lurking in the shadows

The unrestrained growth of shadow banking worries China’s central bank, which fears that a flood of bad shadow loans could prompt a financial meltdown similar to the U.S. subprime crisis in 2008.

China’s shadow bankers are easy to demonize. Like Wang, many are nicotine-stained and seemingly unsophisticated. Their methods are unorthodox, possibly even unsavory. Their loans don’t show up on any balance sheets. They look like a disaster waiting to happen.

I believe these fears are misplaced, and I should know: Eight months after my visit to Hangzhou, I became a shadow banker myself. Since 2011, I have run a microcredit firm in Guangzhou, which provides loans to thousands of small-scale entrepreneurs: florists, restaurateurs, fish farmers, vegetable growers, roadside hawkers.

Although we charge about 24% annually for our money, demand remains virtually unlimited. Our customers are too small and too unstable to get traditional bank loans. At the same time, because we keep our loan amounts small — $20,000 apiece on average — and because we have close contact with our clients, the business has proved reasonably secure. Our bad debts have not strayed above 5% since the firm was founded five years ago.

This month, I visited Wang in Hangzhou again. A few borrowers had defaulted in recent months, he told me, but unlike some of his competitors, he had been “extremely lucky.” He was scrupulous about only lending to clients and businesses he knew well, and years of experience had given him a good eye.

“This is my hard-earned money; I have to be careful,” he told me. “My family was dirt-poor when I was a child. I am just so afraid of becoming poor again.” Wang’s fortune had almost doubled since I had last seen him.

Lower Leverage

One cannot defend a $5 trillion industry with a couple of examples. Two of Wang’s colleagues had been wiped out in the last year after large borrowers defaulted. Several other informal lenders in Hangzhou had ended up behind bars after disgruntled investors accused them of fraud. In recent weeks, news reports have described mass bankruptcies among small businesses that had borrowed heavily from shadow banks at exorbitant rates.

But neither should one condemn all of shadow banking because of stories like these. Shadow banking is well diversified, and serves a legitimate customer base. By and large, it has much lower leverage than banks or corporate China. Losses at shadow banks are often absorbed by entrepreneurs themselves, without affecting the taxpayer.

Even the “wealth management products” offered by regular banks are not to be feared, because they are just deposits, pure and simple, whatever the theoretical distinctions. I buy them myself.

Certainly, the sector could stand to be brought under greater supervision. But many of the regulations already in place are vague and unreasonable. Authorities have never clearly defined something as fundamental as what constitutes “illegal fundraising.” Microcredit operations, like ours, are allowed to borrow from no more than two banks for any more than 50% of their equity capital. Why only two banks? Why only 50%? These restrictions are arbitrary, and they severely limit our ability to lend to underprivileged customers.

The government and the media are scapegoating the wrong culprit. Shadow banking has flourished in China for one simple reason: financial repression. By keeping interest rates artificially low, authorities have forced savers to search for more lucrative financial products. By favoring banks — which, in turn, favor state-owned or well-connected private-sector companies with loans — they have forced small enterprises to seek out people like me and Wang.

Meanwhile, projects that might look sketchy at 9% interest rates suddenly look feasible at 6%. Under such conditions, traditional banks have steadily lowered their lending standards — from prime loans to subprime and then to simply silly loans.

Sound familiar? That’s how the 2008 financial crisis began, too. Leaders are right to worry about the possibility of a banking crisis in China. But instead of focusing their ire on shadow bankers, they should raise benchmark interest rates in order to reduce the amount of credit flowing to dodgy loans through the formal banking sector. The threat to China’s financial system is right there — out in the open — not lurking in the shadows.

Joe Zhang is the author of “Inside China’s Shadow Banking: The Next Subprime Crisis?”

Bloomberg.com



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Watching curvaceous women feels like drugs to men: study

Watching curvaceous women feels like drugs to men: study
February 25, 2010 by Lin Edwards hourglass

(PhysOrg.com) -- It has long been known that men find an "hourglass" figure the most attractive shape for the female body, and now scientists have found out why.

Research across a variety of cultures has demonstrated that men typically find the curvaceous female form sexually attractive. Other studies have shown that wide hips in women are associated with health and reproductive potential, so the attraction makes evolutionary sense.

Scientists from Georgia Gwinnett College in Lawrenceville, Georgia, studied the responses of 14 men with an average age of 25 to nude photographs of women before and after undergoing cosmetic surgery that redistributed fat from their waists to the buttocks to give them more of an hourglass figure. The operations did not reduce the weight of the women, but gave them an “optimal” Waist to Hip Ratio (WHR) of about 0.7.

The fMRI brain scans of the male subjects showed the post-surgery pictures activated the same regions of the brain that are activated by rewards, alcohol and drugs. Changes to women’s body mass index (BMI) did not affect the reward centers, but instead activated brain areas associated with the visual recognition of shape and size. This suggests judgments of female attractiveness based on body fat are based on society expectations rather than being hard-wired in the brain.

Steven Platek, an evolutionary cognitive neuroscientist, said the research may help explain why some men are addicted to pornography, and may also shed some light on other disorders “such as erectile dysfunction in the absence of pornography,” and add to our study of sexual infidelity. It also helps explain phenomena such as sexual harassment and whistling at curvaceous girls in the street. Platek said the BMI results suggest the female form projected by the media, of skinny waif-like models, is not the most attractive to men, and curves are worth their reproductive weight in gold.

The research paper, by Platek and Devendra Singh, presents the first description of the effect of WHR on men’s brains. It was published online in PLoS One on February 5.

More information: http://www.plosone.org/article/info:doi/10.1371/journal.pone.0009042

© 2010 PhysOrg.com

Companies still concerned about rising costs, inflation

Companies still concerned about rising costs, inflation
By Wong Siew Ying, Channel NewsAsia | Posted: 09 January 2010 0042 hrs

SINGAPORE : Even as the Singapore economy shows signs of recovery, companies have said they are still concerned about rising business costs and inflation.

But economists believe excess capacity around the world may somewhat cushion the impact.

The Singapore Chinese Chamber of Commerce and Industry (SCCCI) said two key thrusts for the year are manpower training and tapping on opportunities in the services sector. But uncertainties in Western markets remain a threat.

Speaking at a seminar on Friday, Teo Siong Seng, president, SCCCI, said: "We hope there will be fewer surprises like the Dubai credit crunch, and also cost - manpower cost and oil prices firming up. There is a concern whether there will be an inflation pressure in 2010."

But some economists said excess global capacity may keep inflationary pressure in check for now. And companies re-stocking inventories could provide support to world economies.

David Cohen, director of Asian Economic Forecasting, Action Economics, said: "So far, all we have had is just a slowing in the reduction in inventory. We have not seen much rebuilding yet, so that could potentially still remain supportive for at least the near term. I do not think it poses a major threat to the outlook for 2010."

Mr Cohen also expects the MSCI Asia-Pacific Equity Index to grow by about 10 per cent this year, in line with global economic recovery. The index mounted a strong rebound at the end of 2009, gaining some 34 per cent.

Still, observers have warned that there may be some headwinds that could restrain recovery in 2010. They include sluggish G7 growth after the crisis, weak consumer spending in the US and potential foreign exchange pressures.

Industry players also expect central banks to tighten their monetary policy this year.

Speaking at the seminar, UBS said the three-month Singapore Interbank Offered Rate could reach 0.8 per cent by end-2010, from the 0.5 per cent currently.

Going forward, observers expect Asia to lead the global turnaround, partly due to stronger balance sheets and robust rebound in manufacturing and trade. In particular, the prospects for China, India and Indonesia are most promising.

Professor Bernard Yeung, dean, NUS Business School, said: "New growth has to come out from very sharp resource allocation.

"The challenges would be how do we deal with allocation efficiency problem, how do we deal with productivity enhancement issues, how do we deal with cleaning up the environment, giving people good education, good healthcare that we can keep ourselves as a high skill, high productivity, innovative economy."

Experts also warned about asset bubbles which could push prices beyond fundamentals.

- CNA/ms

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Red Ocean and Blue Ocean

No more HRM lectures and tutorials. Remaining for the HRM is the HRM exam. Can we do a blue ocean?

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HRM Tutorial 4

Our group met up and discuss about the leadership theories and performance for the upcoming tutorial.

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Blue Ocean Strategy Project

Well, since HRM tutorial 3 is now over, and we all have gone through the whole process from identifying the customer's profile, creating BUM, which is the buyer utility map, analyzing the value elements, creating and analysing the six pathe framework,4 action framework and the canvas.

What sums up the whole thing about BOS?

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HRM tutorial 4

After the HRM tutorial 3 presentation,we have some days left to prep ourselves for the last tutorial, HRM Tutorial 4. This tutorial is mainly on leadership and performance and pay.

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Blue Ocean?

Blue Ocean? It is really blue?


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Presentation

This presentation is not the usual presentation that you and I know and would expect.

This presentation marks the ending of HRM tutorial 2 where understanding of the red ocean and its value offerings of the company currently have. This HRM tutorial 3 presentation introduces a new strategy: Blue Ocean Strategy. It uses the six path framework and 4 action framework to identify new value elements to be different from the competitors. The table above shows the red ocean and blue ocean differences.

Our group spent lots of time, energy and effort on this tutorial 3 because it is hard to understand what values we can get out from the six path framework and what are the values we can eliminate and reduce in the 4 action framework.More details are discussed in the failure milestones. 

The main part of the HRM presentation (on BOS) is over, but some portions need to rework and modified and have to submit it soon.

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Red Ocean or Blue Ocean?

So we are in red ocean or blue ocean?
Let's see.


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Blue Ocean Strategy Summary

Blue Ocean Strategy Summary

View more presentations from jessestarmer.

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Blue Ocean

Differences between red ocean and blue ocean strategies. Can we create a successful blue ocean concept?


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HRM Presentations

This week is hrm tutorial 3 presentation. Can we jump out from red ocean to blue ocean?

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