Joe Zhang says shadow banking helps China's small businesses

Joe Zhang reckons there is too much focus on asset quality of the mainland's informal banking sector which, he says, helps small businesses

PUBLISHED : Monday, 01 July, 2013, 12:00am
UPDATED : Monday, 01 July, 2013, 2:21am

Former central banker Joe Zhang shrugs off the suggestion that he went to the "dark side" by leaving the formal banking sector to become a major player in the shadowy and unregulated world of non-bank lending.

"People should wonder why, despite the central government's hostility, shadow banking is growing so fast," he says.

"I don't force you to borrow from me," said Zhang, who invested in three micro-credit financing firms operating on the fringes of the finance sector in China. "You need finance and I can provide it to you - it's a win-win situation for the two of us."

The People's Bank of China, Zhang's employer from 1986 to 1989, may beg to differ. So concerned has it become over the rampant growth of credit advanced by non-bank lenders that it turned its liquidity tap off to the money market last week, allowing rates to soar in a bid to put a choke-hold on the shadow banking sector.

Analysts say unrestrained lending by micro finance firms, pawn shops, trust companies, individuals and private equity investors has thwarted government attempts to restrict credit growth designed to cool the overheated property market.

The PBOC's move saw the weighted average of the seven-day money market rate hit a record 11.62 per cent on June 20, compared with an average of 3 to 4 per cent over the previous few weeks. The spike in rates prompted a rout on the stock market. After authorities relented and reopened the credit spigot, rates eased last week.

The events left Zhang bemused. "The world has misplaced its analytical focus and become obsessed with the asset quality of shadow banking in China," he told the South China Morning Post last week.

The Hong Kong-based financier and founding partner of financial advisory firm Slow Bull Capital has become a recognised authority on the mainland's estimated 23 trillion yuan (HK$29 trillion) shadow banking sector.

Zhang parachuted into the rapidly growing shadow banking sector in 2011 when he joined Wansui Micro Credit in Guangzhou, one of the largest of the mainland's 6,000 licensed micro credit firms. Before that, he worked for Swiss investment bank UBS intermittently for 11 years, including as its head of China research.

He is best known in Hong Kong as the analyst who in 2001 triggered the collapse of agricultural giant Euro-Asia.

His two-year stint with Wansui was an eye-opener, he said. He witnessed some of the "crimes and wrongdoings" of the emerging shadow banking industry and then wrote a book, Inside China's Shadow Banking: The Next Subprime Crisis?'

"I had a burning desire to write a book on shadow banking in April and spent 10 days writing it and getting it published in May," Zhang said with trademark confidence.

"I wrote 45,000 words on my Blackberry. I may be the first person on earth to write a book on a Blackberry. I type more quickly on it than anyone I know."

Despite the revelations in his book, Zhang says that within the shadow banking world there are many professionally run financing firms that should be left alone to fill the gaps left by bank's credit decisions.

He has put his money where his mouth is and now owns three micro credit firms on the mainland. He boasts that Wansui's bad-loan rate was just 3 to 4 per cent last year, below the industry average of 5 per cent. The firm's return on equity was 15 per cent last year.

"By and large, the shadow banking industry is healthy as real interest rates remain in negative territory," he said. "Savers want a better deal and deprived small firms want access to credit, and the middlemen or shadow bankers want to help," he said.

"A plantation owner or a taxi driver may come to us in flip flops and want to borrow 20,000 yuan for two or three months as working capital, and he may get the money in two days," he said.

"If he walks into a bank, he has to put on a suit, prepare a fancy PowerPoint presentation on his case for borrowing, find the right forms, or even have to play golf with the branch governor before going through rounds of approval procedures."

Zhang said a borrower may pay a higher interest rate, about 2 per cent a month, or 24 per cent per annum, compared with the 6 or 7 per cent per annum a bank would charge, but would receive the money quickly. The government allows shadow bankers to charge customers as much as four times the prime lending rate charged by banks.

Though some shadow lenders circumvent the rules by charging service fees, Wansui never did so, Zhang said.

Married with two children, Zhang is now eyeing a move to London. His children, aged nine and 11, are due to start school in the city soon. He is now checking out business opportunities there.