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SHADOW BANKING

Chasing shadows

Wenzhou's bid to curb shadow banking is not working, with government-approved lenders handling a fraction of the overall loan market

PUBLISHED : Thursday, 28 March, 2013, 12:00am
UPDATED : Thursday, 28 March, 2013, 6:31am
 

Zhou Xiang is playing with his mobile phone in a room just big enough for a desk and chairs at the year-old Wenzhou Private Lending Registration Centre. Not a single prospective customer has shown up for hours.

As a government-sanctioned loan broker seeking to match cash-strapped business owners with private investors, Zhou is one of the few people who can even be found inside the two-storey building in a high-end residential district of Wenzhou, in the southeastern province of Zhejiang. Rows of airport-like seats are empty.

"Only those who are really out of options would come here for loans," says Zhou, a manager at Sudaibang, one of five independent brokers operating out of the centre. "Most of the time, you would find these firms so weak financially that they can be crushed by a straw. The volume of lending is so low that we ourselves won't be here long without expanding into some other businesses."

One year after the mainland's leaders picked Wenzhou to start a pilot programme designed to curb and regulate the city's informal shadow-lending networks, it's clear the plan isn't working. Small firms it intended to benefit still can't access loans because they lack collateral and are struggling to stay afloat. At least one broker, Beijing-based CreditEase, has given up, citing a gap between the centre and targeted borrowers.

"We made some efforts and progress, but we didn't achieve any meaningful breakthroughs," said Zhou Dewen, the chairman of the Wenzhou Small and Medium-Sized Enterprises Development Association, which has more than 1,000 members. "To reform means to take bold moves and not be afraid of making mistakes, but no government officials are willing to put their jobs on the line. If they could feel the pain of small businesses, they may understand that Wenzhou is running out of time."

Former premier Wen Jiabao announced the project last year after more than 80 businessmen, unable to make payments on underground loans, committed suicide or declared bankruptcy in Wenzhou over a six-month period. At the National People's Congress in Beijing this month, where Li Keqiang took over the premiership, no top government leader mentioned the programme or any measures to curtail shadow banking.

Of the 12 measures proposed by Wen, only two - the opening of the registration centre and allowing qualified small firms to issue bonds - have got off the ground. While officials in other mainland cities have indicated a desire to copy Wenzhou's lending centre, none has.

Shadow lending flourishes because an estimated 97 per cent of the mainland's 42 million small businesses can't get bank loans, and savers are seeking higher returns than lenders pay for deposits. UBS estimates the size of the industry, including private lending, banks' off-balance-sheet vehicles and trusts, at US$3.35 trillion, or 45 per cent of gross domestic product. A study by Zhou of the Wenzhou association and a group of academic researchers put the amount of private lending among individuals at about 3.7 trillion yuan (HK$4.58 trillion).

Private lending in Wenzhou stood at about 120 billion yuan at the end of 2012, a 20 per cent decline from the peak two years ago and accounting for 17 per cent of official lending, Zhou said. Failure to put what he estimates is 800 billion yuan of idled private capital to better use is affecting the economy.

Wenzhou isn't as frenzied as it was a year ago. Wangjiang Boulevard, once known for its neon lights and nightclubs where businessmen gathered, is quieter. The Ferraris, Porsches and other luxury cars that blanketed parking lots are gone. Some pubs have been turned into teahouses, while others have closed.

As more than 400,000 small businesses ranging from eyewear makers to cigarette-lighter exporters struggled, Wenzhou's economy expanded 5.7 per cent in the first nine months of 2012, compared with 7.7 per cent nationwide. Bigger firms didn't fare much better: more than 60 per cent of the city's 3,998 major industrial firms had cut production, according to a July survey.

At the lending centre, the 594 million yuan in loans made as of March 11 are just 0.5 per cent of the value of the city's underground-lending market, according to Chen Xijun, a director of the local chamber of commerce.

"This is significantly below our expectation and has become an embarrassment," Chen said. "We had thought that all of the city's private capital would have emerged after the registration centre."

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