When asked to describe his business model, the manager of a large private bank in Guangzhou replied last week: “Opportunistic”.
And that’s the problem. Originally, China’s private banks filled the shortfall left by state banks, lending to the country’s dynamic, but cash-hungry SMEs. Operating more like an investment club, they lent locally and understood their risks.
But what started out as a good idea has since been warped by China’s long standing problem of excess liquidity. The private banks are now contributing to a bubble that is starting to look like that in the West during the past decade.
In China, there’s no substitute for field research given the opacity of data, and over the past two months I’ve met with a range of private banks that most often masquerade as officially approved credit guarantee companies.
It is clear why the private banks have succeeded. They can make a decision on your loan in 1-2 days, and their administrative costs are estimated at just one-fifth those of the state banks, mainly because they lend locally. Speed is especially important for an SME that runs up against working capital problems.
However, the PBOC’s relentless (and commendable) tightening of monetary policy has contributed to soaring grey money market rates. Monthly interest rates can range between 3 per cent and 6 per cent, and often higher.
It’s difficult to imagine any SME borrowing at these rates in order to invest in new machinery.
And most often they don’t. Instead, the private banks are increasingly lending for speculative purchases where the yields are naturally higher. Commercial property is one. But I’ve equally heard of jade stones and other precious goods.
In the city of Longyan, in southern Fujian province, there is even evidence of state bank employees taking out loans for personal use, as they are entitled to, only to deposit the proceeds in a private bank and earn the arbitrage.
The lesson is that even the PBOC, masters at administrative tightening, are struggling to prevent the country’s excess liquidity from being put to speculative use, even as sources of credit for the real economy dry up.
(The fact that medium- to long-term loans as a share of lending by the state banks has soared 8 percentage points since the crisis is another indication that even when the state banks do make loans, it’s primarily to other state agencies).
Opportunistic describes many Chinese; The largest opportunity often comes from policy changes. Strictly speaking loan guarantee firms are not even banks, they are not authorized to lend money except for providing guarantees of the borrowers but they switched to a lending position themselves.