Tag Archives: Wenzhou

Breaking Up China’s Big Banks

Every leading nation’s big banks wield political clout. China’s, being state-owned and run by big political players in their own right, sit more easily at the center of power than most. They see it as their rightful place. Both they and the government see their role as providing conduits of national policy. Administrative guidance to the banks sets the course for their customers in business and industry in the cause of economic growth, be that slowing inflation, deflating bubbles or stimulating growth. So when Prime Minister Wen Jiabao says the big banks’ monopoly needs to be broken as they make easy money for themselves while denying loans to cash-strapped small and medium-sized enterprises he needs to be assured that he is safe in rattling such powerful cages and that the need to do so is urgent.

In the words of the song, breaking up is hard to do. Yet Wen’s words at least get the idea on the table and add to the determined thrust by the economic reformers to use the leadership transition now underway to revitalize near moribund financial reform. Wen again pointed to the pilot scheme in Wenzhou to create alternative financing channels for small and medium-sized enterprises in the city that have hitherto been forced into the usurious shadow banking system. This is being seen by some as an experiment that if successful will be expanded more broadly as a necessary underpinning of the rebalancing of the economy towards domestic demand.

The prime minister’s words came as regulators further opened capital markets to foreign investors. That, though, is politically easier to do than taking on the big banks, large redoubts of vested interests that they are. The opportunity to do so may lie in the slowing economy turning more bank loans sour. Government has had to step in once before to clean up the state-owned banks’ balance sheets. The price for doing so again could be more conditional. And might it even include the big banks improving their rudimentary credit-risk analysis? A bit more competition wouldn’t go amiss in that regard, while plenty of entrepreneurs would be happy to have their creditworthiness judged on their business prospects rather than their political connections.

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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’s Unheeded Killer Blamed For Wenzhou Train Crash

Leaks from the official investigation into the high-speed train crash at Wenzhou that killed 40 on July 23rd suggest that lightening and mismanagement are being fingered for the blame (here via Caijing). What is being described as lightening that flashed 100 times in seven minutes is believed to have stalled the first train while a faulty signal failed to stop the second train running into it from behind. While there have been reports of systemic problems with the sensors in the signaling system, the lightening strikes may have knocked this particular one out.

As we have noted before, lightening is a deadly killer in China. Some 300 people were killed by it last year, and in 2007, 744 died from lightening strikes.

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An Indian Lesson For China’s High-Speed Railways

An interesting tidbit from our man in Delhi who says that the 7/23 Wenzhou train crash has struck a particular note there as India evaluates where to build its first high-speed passenger rail line.

For all its extensive rail system and extensive railway exports to elsewhere in Asia and Africa, India has been cautious about committing the considerable financial resources that are needed for such projects. But what caught our ear was our man’s description of how public the debate has been in India over high-speed rail and how independent the assessments of the feasibility of the competing projects have been.

That stands in marked contrast to the experience in China. We read daily of how former railways minister, Liu Zhijun, now removed from office and under investigation for corruption, forced through his plans to build out rapidly China’s high-speed rail network, regardless of expense, brooking no opposition and freezing out critics who said he was sacrificing safety for speed.

In the mid-2000s, our man tells us, when India’s railway ministry proposed a high-speed passenger line from Mumbai to Ahmedabad, the government had it reviewed independently by a state-owned transport consultancy, which decided the project was not economically viable as a passenger line, given India’s state of development, but could be beneficial to the country as a freight line, so the passenger plan was scrapped. No cosy arrangements there.

India’s latest effort in this area was announced last year by then railways minister, Mamata Banerjee, now chief minister of West Bengal, who proposed six possible lines. These the government has had studied over the past year by international consultants, with a choice expected shortly of which will be first to be built. The cabinet is also proposing to set up an independent agency that will monitor the implementation of whichever line is chosen.

How fast the trains will run has also been a matter of debate. Many in the railways ministry wanted to start slow, 200 km/h-250 km/h, though there has been some political pressure to go faster, 350 km/h, to show that India can bridge the technology gap as Japan has done and China had appeared to have before the Wenzhou crash confirmed the worse fears of critics.

Now, India has no high-speed passenger rail lines and China has the world’s largest network at approaching 10,000 kms. But, had China’s high-speed plans had the transparency, scrutiny and accountability that occurred in India, not only might the railways ministry not have debt of 1.25 trillion yuan ($194 billion) but the Wenzhou tragedy may never have occurred.

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The Political Damage Of The Wenzhou Train Crash

Beijing’s top-level ordering of an investigation into the weekend’s fatal high-speed train crash at Wenzhou hard on the heels of a railways ministry decision to implement a two-month safety review of the whole troubled system reeks of crisis management badly handled by a government on the back foot. The leadership has not faced such public criticism for its handling of a disaster since the 2008 Sichuan earthquake.

Questions are being raised about Beijing’s competence to look after its people, which hits directly at the basis of the legitimacy of its monopoly rule. That is more serious for the Party than the shredding of national pride in the rapid development of a high-speed rail network, already tattered over recent months by the corruption and safety scandals surrounding it, or what looks like an immediate coverup by railway ministry officials by burying the evidence, pretty much to be expected.

The initial reaction of paying off the families of the victims in short order at 500,000 yuan ($77,600) and the sacking of three rail officials, even before rescue operations were complete, reflects an old-school attitude that government is about administration, silencing and punishment that is increasingly out of touch with the expectations of Chinese. So is the instruction to state media to focus on positive stories while the official investigation is carried out. Online discussion, by contrast, has been angry, and about transparency, the quality of economic growth and the value of prestige projects.

Adulterated food, melamine-tainted infant formula, chemical spills in rivers, the most dangerous coal mines in the world: the list of where China falls short in safety seems to grow daily, and the victims are its own. History shows that every industrializing society tends to have one disaster that triggers change in official attitudes to safety. The Wenzhou crash may or may not turn out to be that symbolic moment. But it is significant. High-speed trains are not mass transportation. They are used by the prosperous, urban, middle-class. Criticism by an educated, well-connected section of the population is of particular concern to the Party, as it is from there that any long-term challenge to its monopoly rule is likely to come. That is why the leadership is now scrambling to regain control.

Footnote:  The crash has also inflicted a body blow to China’s hopes to export its high-speed trains and the rails on which to run them. It confirms its critics worse fears of inferior equipment and shoddy construction that no amount of low cost can offset. Japan and South Korea are the likely beneficiaries, a further prick to national pride.

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