Jul 11, 2013

    Don't blame shadow bankers


    IN THE autumn of 2010, as deputy head of China investment banking at Swiss bank UBS, I spoke to a group of wealthy investors in Beijing about the outlook for Chinese stocks.

    A rumpled, 50-something man from Hangzhou named Wang Zhigang pulled me aside afterwards and asked for my advice on investing. He had made his money through kerbside lending, not stocks.

    But, he lamented, his returns had dropped from more than 30 per cent a year to a mere 23 per cent. He worried about his personal fortune, which he had built up from nothing to almost 3 billion yuan (about US$445 million back then).

    He hardly needed my advice, I told him. "With your performance, even Ba-Fei-Te should farm out some money for you to manage!" I said, referring to Mr Warren Buffett's name in Chinese.

    Intrigued, I flew to Hangzhou a few days later to find out how Mr Wang had done so well. He drove me to the Haining Leather Market to meet some of his customers. They were merchants of leather shoes, handbags and accessories.

    The murky and unregulated financial universe of shadow banking is now worth an estimated US$5 trillion (S$6.4 trillion), challenging the dominance of the traditional banking sector.

    China's shadow bankers are easy to demonise. Like Mr Wang, many are nicotine-stained and seemingly unsophisticated.

    Their methods are unorthodox, possibly even unsavoury. Their loans don't show up on any balance sheets. They look like a disaster waiting to happen.

    I believe these fears are misplaced, and I should know: Eight months after my visit to Hangzhou, I became a shadow banker myself.

    Since 2011, I have run a microcredit firm in Guangzhou that provides loans to thousands of small-scale entrepreneurs: florists, restaurateurs, fish farmers, vegetable growers and roadside hawkers.

    Although we charge about 24 per cent annually for our money, demand remains virtually unlimited. Our customers are too small and too unstable to get traditional bank loans.

    At the same time, because we keep our loan amounts small - US$20,000 apiece, on average - and because we have close contact with our clients, the business has proved reasonably secure. Our bad debts have not strayed above 5 per cent.

    This month, I visited Mr Wang in Hangzhou again. A few borrowers had defaulted in recent months, he told me, but unlike some of his competitors, he had been "extremely lucky".

    He was scrupulous about lending only to clients and businesses he knew well, and years of experience had given him a good eye.

    His fortune had almost doubled since I had last seen him.

    One cannot defend a US$5-trillion industry with a couple of examples. Two of Mr Wang's colleagues had been wiped out in the past year after large borrowers defaulted.

    In recent weeks, news reports have described mass bankruptcies among small businesses that had borrowed heavily from shadow banks at exorbitant rates.

    But one should not condemn all of shadow banking because of stories like these either. Shadow banking is well diversified, and serves a legitimate customer base.

    The government and the media are making shadow banking a scapegoat. Shadow banking has flourished in China for one simple reason: financial repression.

    By favouring banks - which, in turn, favour state-owned or well-connected private-sector companies with loans - they have forced small enterprises to seek out people like me and Mr Wang.

    Joe Zhang is the author of Inside China's Shadow Banking: The Next Subprime Crisis?