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Inside China's Shadow Banking: The Next Subprime Crisis
Is shadow banking in China likely to become the source of the next global financial crisis or simply a little understood area of the enormous Mainland economy? Joe Zhang pulls back the curtain on this sector and explains how shadow banking in China impacts the regional and world economies. He also pinpoints the areas of concern based on his experience in the field and his knowledge of the complicated regulations of banking in China gathered during his years as a staffer at the central People's Bank of China in Beijing. Drawing on his 11 years spent at UBS, as well as the work of prominent economists, Joe Zhang explains shadow banking in China for investors, economists, laypeople, and the general public. In 2001, Joe Zhang resigned as Deputy Head of China Investment Banking at UBS to become the chairman of a microcredit company in Guangzhou. This book is both his personal story and a frank assessment of the shadow banking industry in modern China.
- GenresEconomicsNonfiction
176 pages, Paperback
First published May 15, 2013
5 people are currently reading
67 people want to read
About the author
Joe Zhang
10 books2 followersJoe Zhang, 51, is a corporate governance advisor based in Hong Kong. He worked for 11 years at UBS, mainly as Head of China Research and then Deputy Head of its China Investment Banking Division. He was an official of the central People's Bank of China in Beijing from 1986 to 1989. Between 2006 and 2008, Joe was the Chief Operating Officer of Shenzhen Investment Limited, a government company.
In the past two decades, Joe's numerous articles have appeared in The Wall Street Journal, Financial Times, Bloomberg, South China Morning Post, The Australian Financial Review, The New York Times, and the International Herald Tribune.
Joe Zhang is the author of the bestseller Inside China's Shadow Banking The Next Subprime Crisis which was published in 2013. His latest title is Party Man Company Man Is China's State Capitalism Doomed Both books are published by Enrich Professional Publishing.
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Displaying 1 - 6 of 6 reviews
July 12, 2013
By Peter Thal Larsen
Joe Zhang has impeccable timing. The former investment banker’s book about running a small Chinese microcredit firm, “Inside China’s Shadow Banking”, has hit shelves just as concerns about the country’s runaway credit boom are capturing global headlines. Yet despite the title, it’s China’s state-owned banking system that emerges as the tale’s dysfunctional villain.
Zhang’s story is part memoir, part diagnosis. It begins with his brief tenure as chief executive of Wansui Microcredit, a small lender in southern China making business loans with interest rates as high as 23 percent a year. In extensive and sometimes unnecessary detail, he describes the controlled chaos of an institution struggling to grow despite restrictive rules and unsympathetic regulators. In an attempt to build a more sustainable firm, Zhang deploys all the tools of Chinese business: personal connections, mutual backscratching, and endless dinners.
China’s pervasive corruption is never far from the surface. Shortly after arriving at Wansui, Zhang discovers that two senior managers have accepted stock options from a borrower in return for a cheap long-term loan. Later, a private equity investor tries to interest him in a business that will raise money by selling investment products to bank customers. Success is assured because the bank president’s cousin has been granted a secret stake in the business. Zhang professes himself shocked, and steers clear.
Along the way, Zhang provides a helpful taxonomy of China’s shadow banking industry - a phrase that is as widely used as it is little understood. It is a world full of misleading labels. Beyond its name, Wansui Microcredit has little in common with the lending schemes for Bangladeshi peasants made famous by Nobel laureate Muhammad Yunus. “Trust companies” sound reassuring, but actually resemble Wall Street investment firms, arranging high-risk loans for borrowers shut off from conventional bank credit. Perhaps the best euphemism of all is “wealth management products”, actually parcels of risky loans sold to bank customers on the unspoken assumption that the institution will pick up the tab if things go wrong.
Critics often point to China’s shadow banking boom as evidence of the shaky foundations of economic growth. Zhang, however, makes a compelling argument that real problem lies with China’s regulated banking industry. Official interest rates, which are tightly controlled, have fixed the cost of borrowing below the pace of inflation for decades. Loan volumes are controlled by crude quotas imposed by the central bank. As a result, access to credit is determined not by market forces, but by official decree or personal connections.
Those able to borrow, mostly big state-owned firms, have ample opportunity to make extensive and sometimes wasteful investments. Smaller companies are forced to seek out alternative sources of credit at much higher rates. Consumers who are tired of watching the real value of their savings dwindle in their bank accounts speculate on property or other risky investments. This system is not just inefficient; it’s also responsible for China’s rampant inequality.
When China’s interbank interest rates spiked in June, the central bank held back from a rapid, public intervention. That decision has been praised as a sign that the authorities are finally willing to rein in uncontrolled credit growth. Yet it can also be interpreted as a retrograde step that will reduce the flow of credit to those that do not enjoy official favour. Zhang concludes the only solution is to loosen restrictions on bank interest rates and let the market decide.
But he admits that doing so will be dangerous: “The major challenge for the economy and the banking industry in the next decade is how to abandon financial repression without causing havoc.”
Zhang claims to have written this book on his Blackberry in ten days, and it shows. Its structure is as chaotic as the world he describes. The text flits between personal anecdote, biographical detail and analytical observation. Terms that might confuse the uninformed reader are not always explained. Nevertheless, these dispatches from the wild lending frontier add colour to a topic that is often lacking details.
That, and Zhang’s excellent timing, makes it a valuable reference for anyone attempting to understand the causes, consequences and conclusion of China’s credit boom.
Joe Zhang has impeccable timing. The former investment banker’s book about running a small Chinese microcredit firm, “Inside China’s Shadow Banking”, has hit shelves just as concerns about the country’s runaway credit boom are capturing global headlines. Yet despite the title, it’s China’s state-owned banking system that emerges as the tale’s dysfunctional villain.
Zhang’s story is part memoir, part diagnosis. It begins with his brief tenure as chief executive of Wansui Microcredit, a small lender in southern China making business loans with interest rates as high as 23 percent a year. In extensive and sometimes unnecessary detail, he describes the controlled chaos of an institution struggling to grow despite restrictive rules and unsympathetic regulators. In an attempt to build a more sustainable firm, Zhang deploys all the tools of Chinese business: personal connections, mutual backscratching, and endless dinners.
China’s pervasive corruption is never far from the surface. Shortly after arriving at Wansui, Zhang discovers that two senior managers have accepted stock options from a borrower in return for a cheap long-term loan. Later, a private equity investor tries to interest him in a business that will raise money by selling investment products to bank customers. Success is assured because the bank president’s cousin has been granted a secret stake in the business. Zhang professes himself shocked, and steers clear.
Along the way, Zhang provides a helpful taxonomy of China’s shadow banking industry - a phrase that is as widely used as it is little understood. It is a world full of misleading labels. Beyond its name, Wansui Microcredit has little in common with the lending schemes for Bangladeshi peasants made famous by Nobel laureate Muhammad Yunus. “Trust companies” sound reassuring, but actually resemble Wall Street investment firms, arranging high-risk loans for borrowers shut off from conventional bank credit. Perhaps the best euphemism of all is “wealth management products”, actually parcels of risky loans sold to bank customers on the unspoken assumption that the institution will pick up the tab if things go wrong.
Critics often point to China’s shadow banking boom as evidence of the shaky foundations of economic growth. Zhang, however, makes a compelling argument that real problem lies with China’s regulated banking industry. Official interest rates, which are tightly controlled, have fixed the cost of borrowing below the pace of inflation for decades. Loan volumes are controlled by crude quotas imposed by the central bank. As a result, access to credit is determined not by market forces, but by official decree or personal connections.
Those able to borrow, mostly big state-owned firms, have ample opportunity to make extensive and sometimes wasteful investments. Smaller companies are forced to seek out alternative sources of credit at much higher rates. Consumers who are tired of watching the real value of their savings dwindle in their bank accounts speculate on property or other risky investments. This system is not just inefficient; it’s also responsible for China’s rampant inequality.
When China’s interbank interest rates spiked in June, the central bank held back from a rapid, public intervention. That decision has been praised as a sign that the authorities are finally willing to rein in uncontrolled credit growth. Yet it can also be interpreted as a retrograde step that will reduce the flow of credit to those that do not enjoy official favour. Zhang concludes the only solution is to loosen restrictions on bank interest rates and let the market decide.
But he admits that doing so will be dangerous: “The major challenge for the economy and the banking industry in the next decade is how to abandon financial repression without causing havoc.”
Zhang claims to have written this book on his Blackberry in ten days, and it shows. Its structure is as chaotic as the world he describes. The text flits between personal anecdote, biographical detail and analytical observation. Terms that might confuse the uninformed reader are not always explained. Nevertheless, these dispatches from the wild lending frontier add colour to a topic that is often lacking details.
That, and Zhang’s excellent timing, makes it a valuable reference for anyone attempting to understand the causes, consequences and conclusion of China’s credit boom.
April 7, 2014
You have to like Joe Zhang as he tells his personal story about the microcredit industry in China. Only 5% of bank lending is directed at SMEs (Small and Medium-sized Enterprises). The shadow banking sector is the only place for many Chinese businesses and Zhang analyses the role of the state in regulation and discusses the place of this subprime sector in the economy… and how to clean it up. Shadow banking in Zhang's estimation makes up about 40% of GDP compared to 111% in America and high in other 'Western' nations, but the growth has been mainly in the last 20 years. Microcredit will continue to increase in importance based on the structural needs of the Chinese economy, but it may have devastating results down the line that are concerns for Zhang. China holds interest rates far too low at regular banks making money cheap for those that get approved for loans and cheats the regular saver in the market. The danger of money cheaper than inflation has some pretty disturbing deformations on the market providing fertile ground for bubbles.
July 6, 2015
A mini autobiography, hence a little too well-painted in some parts
But the author does show China's underbelly in an honest light
Hidden inflation
Financial repression
Circumventing rules in the system, aided by the system
A large number of beneficiaries throughout the system
And a centrally controlled economy that cant be controlled too well
Very good insights into who the beneficiaries of the system are
And finally, a bubble that has gone on for too long
But the author does show China's underbelly in an honest light
Hidden inflation
Financial repression
Circumventing rules in the system, aided by the system
A large number of beneficiaries throughout the system
And a centrally controlled economy that cant be controlled too well
Very good insights into who the beneficiaries of the system are
And finally, a bubble that has gone on for too long
December 4, 2013
Interesting approach from a bottom-up perspective. Very interesting on legal matters, how China has a hard time focusing on local problems. Also, well described microcredit industry, however I would have expected a little more suggestions on the matter and his future goals.
October 26, 2014
Interesting insight into micro finance in China. Found the book a bit repetitive at times and the epilogue should have been the prologue. Also the writing style of the epilogue should have been leverage for the whole book.
September 1, 2016
Might still be the first book on China's shadow banking, at least it is in Amazon
Displaying 1 - 6 of 6 reviews