Tag Archives: financial services

Bringing Wenzhou’s Black Lenders Out Of The Shadows

Wenzhou is a case study in the deep fault lines underlying China’s financial system. While big state-owned enterprises could get credit easily and cheaply, even in the face of the official squeeze on bank lending to cool inflation, small and medium sized company owners and entrepreneurs had to turn to the underground banking system where interest rates can top 60%. In Wenzhou, it is estimated that lending through the shadow banks, also known as black banks and which run from unregulated lending pools to loan sharks, amounts to $78 billion a year — accounting for a fifth of the lending in the city. Some 90% of its households supply the capital in an attempt to get a higher yield on their savings than is available from official banks.

Yet the city, which prides itself on its entrepreneurial flair, has also seen a rash of suicides and absconsions by heavily indebted borrowers unable to meet their crushing interest payments, especially as the economy slowed and speculative real estate and stock market investments, into which much of the borrowed money had been directed, fell in value. Around 100 business owners from the city disappeared or declared bankruptcy. Though only a few firms have collapsed, the interconnectedness of small businesses causes cash-flow reverberations up and down supplier and customer chains. One in five of Wenzhou’s  360,000 small and medium-sized enterprises reportedly stopped operating last year due to cash shortages.

So serious has the credit crunch and the risk of a bad-debt implosion become in Wenzhou that, a police crackdown on borrowers having failed to deter the lending, the State Council has now approved a pilot project to bring this shadow system into the light. Some lenders will be allowed to convert to rural banks or micro-finance companies, big state-owned banks will be directed to make more credit available in the city (as they already have been), and new savings and investment vehicles, including offshore ones, will be opened up to city residents and small and medium-sized enterprises. These vehicles will offer potentially better returns than bank savings accounts. (With the persistence of inflation over the past 18 months, real interest rates have been negative.)

The proposals are also intended as a test of expanded financing channels for small and medium-sized businesses, as well as an attempt to drain the property and stock markets of speculative capital that authorities would prefer used to keep growth and employment going in the real economy. What is not yet clear is whether these new  institutions will experiment with market-set interest rates, as the original set of proposals put forward by the city government last November had called for. That may still be a reform too far.

Nationally, the underground banking system was officially said last year to have $470 billion in outstanding loans, though unofficial estimates are half as much again. Fitch, a U.S. ratings agency, has estimated that every other yuan now lent in China comes through a shadow bank. That is a scary share for an unregulated sector surrounded by still inflated asset bubbles. It is fault line that runs deep and far beyond Wenzhou.

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China Plays Tit-For-Tat Over U.S. Banks’ Access To Domestic Market

Deutsche Bank’s newly announced tie up with Shanxi Securities to offer investment banking services is expected to get the official nod later this year. Credit Suisse has recently got approval for its joint venture with Founder Securities, the first such since the moratorium on securities joint ventures was lifted in December. But Morgan Stanley and Citigroup are still waiting for approval for their jv deals and Merrill Lynch, JP Morgan and Lehman Bros. have got no farther than discussions with potential partners.

Bias against Wall St. firms? The FT thinks it is.

What would break the logjam for U.S. investment banks?

This Bystander would wager that it would be Washington letting China’s leading banks set up and expand branch networks in the U.S. as they have wanted to do for years.

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Million Buck Bonuses

Chinese securities companies and asset management firms are now paying million dollar bonus to retain staff, according to the FT. So fierce is competition for experienced professionals that Wall St.-style bonuses now rule.

There are only 300 people with all the required regulatory qualifications to manage funds, according to the FT’s report, and staff turnover has been running at 30% at the 60 approved asset management, which have seen assets under management increase tenfold to $450 billion in the past two years. Such is the power of supply and demand.

Investment bankers underwriting initial public offerings have also done very nicely. There were $65 billion-worth last year. Investment banks typically take 3%-4% of that in fees.

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CIC Welcome

While the electioneering U.S. takes China’s and other sovereign wealth fund’s capital but frets about foreigners buying America, the U.K. is courting it. British prime minister Gordon Brown, now visiting Beijing, told his counterpart Wen Jiabao that he would like the China Investment Corp. to set up an office in London as a base from which to invest some of its $200 billion.

True, this is part of London’s continuing battle to one-up New York as the world’s financial capital, but the U.K. has clear attractions for China as an investment front door into the EU. China has an interest in buying into companies with expertise in financial services and with technologies it needs to develop its 20 champion industries. Europe has both, and on the tech side, green technologies in particular. Plus at a time of economic uncertainty, there are companies there going cheap, just as there are in the U.S.

As former Citibank chairman Walter B. Wriston said, capital goes where it is needed, but stays where it is welcome.

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From Steel To Insurance

Baosteel, China’s largest steel maker, is making a measured diversification into financial services in general and insurance in particular. The moves are worth following as a case study in the shaping of a national champion.

This month the company has upped its stake in New China Life, the country’s fourth largest life insurer, to 17.3% from 9.7%, making it the third largest shareholder, reports the People’s Daily. That puts it behind Zurich Insurance (20%, the maximum permitted) and the state insurance protection fund (30.6%), which stepped in last year to bail out the insurance company after financial scandal.

Through its Huabao Investment subsidiary, Baosteel is already the largest shareholder in China Pacific Insurance Co. with a 21.4% stake. It has a small stake in Huatai Property & Casualty, and there are reports from Japan of a joint venture in the offing with Dai-Ichi Mutual Life, Japan’s second largest life company.

Japan’s largest life company, Nippon Life, has had a similar joint venture with Shanghai’s SVA Group since 2003. An earlier proposal for a Baosteel-Nippon Life tie up went nowhere because of Baosteel’s competitive stake in China Pacific, which may get sold if the Dai-Ichi joint venture is approved by regulators as expected. The U.S. private equity firm, Carlyle Group, holds a position in China Pacific, so there is ample scope for deal making.

There are a lot of Japanese firms operating in the Yangtze River Delta while Baosteel is based in Shanghai. The model, though, would appear to be Generali China Life, a joint venture between Italy’s Generali and state-owned energy giant China National Petroleum, that is successfully selling group life insurance policies. Baosteel brings cash flow from its steel-making business and a large customer base for potential group policies should it be tempted to go beyond taking passive investment stakes into more active involvement in the insurance business.

Tempting, too, to see the hand of Beijing at work in the background here, moving a large state-owned firm into an industry that is not only strategically important for China’s economic development, and set to be expanded over the next few years, but that also can play a role as a stabilizing institutional investor in Shanghai’s wild-west stock market, or as a conduit for foreign investment. In the first 11 months this year, Chinese insurers’ investments reached 1.83 trillion yuan ($250 billion), according to the state regulator, China Insurance Regulatory Commission (CIRC).

Baosteel has invested a reported 5.3 billion yuan in financial services firms, even as it works with Beijing to shut down steel mills — only outdated and heavily polluting ones; it is not getting out of the steel business. As well as its insurance investments, it holds stakes in Shanghai Pudong Development Bank, Bank of Communications and Industrial Bank.

Developing Japan put financial firms at the heart of its keiretsu; South Korea, heavy and light manufacturing at the heart of its chaebol. China’s version looks to be being built around giant state owned national champions.

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Slowly Spreading Jam

The latest Strategic Economic Dialogue meeting between China and the U.S. has concluded with a long study list for the two governments and few parting gifts from Beijing in the form of more financial markets opening.

Foreign firms will be allowed to invest again in domestic securities companies, though a cap of a maximum 33.3% stake will stay in place for a while. However, Beijing said as long ago as May that it would resume licensing securities joint ventures later this year after a two-year hiatus. Foreign banks and other companies that do business in China will also be allowed to issue debt and equity in the domestic markets if the capital raised is to be used for expanding their Chinese businesses.

What the Americans didn’t get was freedom for foreign companies to take bigger stakes in Chinese financial firms and for Chinese-foreign joint ventures to be allowed to undertake a wider range of businesses. That is jam being held back for tomorrow.

In a little dig reminiscent of the product safety row between the two countries, Zhang Xiaoqiang, vice head of the National Development and Reform Commission, China’s top economic planner, called on the U.S. to be more open to Chinese investments and to clarify which parts of the economy were off-limits to foreign investors on national security grounds. Under new U.S. legislation that came into force in October, foreign investments in infrastructure and high-tech and those coming from foreign state-owned enterprises face intensified review. Zhang identified the chemical, medical, mechanical, space and electronic businesses as areas where Chinese companies were interested in investing, but clearly feel they will face discriminatory scrutiny.

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