Tag Archives: Savings

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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An Economic Consequence Of China’s One-Child Policy

One overlooked and unintended consequence of the one-child policy: it pushes up China’s savings rate. A study by Shang-Jin Wei and Xiaobo Zhang, first published in 2009, updated in January this year and just re-released by Columbia Business School, where Wei holds the N.T. Wang chair of Chinese business and economy, finds:

Not only that households with sons save more than households with daughters in all regions, but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.

The cause and effect is straightforward: parents with a son raise their savings in a competitive manner in order to improve their son’s relative attractiveness for marriage. About half of the increase in the savings rate of the last 25 years, Wei says, can be attributed to the rise in the sex ratio imbalance.

Wei adds:

None of the discussion about global imbalances has brought family planning policy or women’s rights to the table, because people do not see these issues as related to economic policy. Our research suggests that this is a serious omission.

A thought to throw into the discussion on global imbalances at the forthcoming round of the Annual Strategic and Economic Dialogue between China and the U.S. that take place next Monday and Tuesday, loathe though we are to create yet another point of friction between Beijing and Washington.

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Will Chinese Consumers Spend Or Keep Saving?

One consequence of the global recession is that global economic imbalances have narrowed (perhaps the only thing to have gone by the text book in this recession). But with U.S. consumers buying less, Chinese producers need to find new markets, including at home. Rachel Ziemba of RGE Monitor, guest posting on Brad Setser’s Follow The Money, looks at whether the Chinese will be spenders or keep saving.

Whether the Chinese stimulus is able to boost private consumption ahead will be critical to global and Chinese demand. So far Chinese consumption has held up and even grown slightly from a weak base –as illustrated by retail and auto sales. Yet one reason that the Chinese economic reacceleration is fragile is because it is uncertain where the new production in China’s factories will be consumed. Chinese domestic demand still seems weak and overpowered by some structural incentives to save.

Her cross-linking suggests she thinks it will take some time for those structural disincentives to be eliminated, and that in the meantime, because the cost of capital in China remains well below global costs, there is a risk that steps Beijing has taken to stimulate the economy could end up in asset bubbles rather than in Chinese consumers’ pockets to boost domestic demand.

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