Shadow Banking in China Comes Into the Sunlight
WHY YOU SHOULD CARE
Because modern economies run on credit, which may help with China’s recent slump.
By Steven Butler
Keeping financial indiscretions hidden in China is getting tougher to pull off. Just ask one 53-year-old who lives in a town in the interior mountains of the coastal Fujian province, and who racked up no fewer than eight court judgments against her in roughly two years. She failed to repay 100,000 RMB ($15,600) to private lenders in one case, and about $25,000 in another; now her home address along with access to details on more than 1 million fellow scofflaws are all freely available online to anyone.
Yep, that kind of public shaming is what happens in China today when you borrow a lot of cash and don’t pay it back. And whom do we have to thank for all this juicy intel? Why, none other than the Chinese government.
Call it the Great — transparent — Wall of China. Bit by bit, the country is building out the infrastructure to support a modern credit system, which is meant to usher in more rules to govern transactions and easier access to credit information on potential borrowers. Part of this includes the unveiling of Credit China, which launched in June and features data pulled from various government agencies on issues such as loan defaults, tax evasion, court orders and fraud. But that’s just one of a growing number of tools the private economy is starting to turn to that includes new credit agencies and online lenders, as well as a more active and open court system to resolve disputes that’ll likely see more cases as China’s economy continues to slump.
Now there are plans for credit bureaus and Internet-only banking services.
As China’s economy has grown over the years, the country has begun increasingly relying on private companies to fuel it. Yet, at the same time, its institutions that funnel financial resources away from state-owned companies have struggled to keep up in some ways. Sure, they’ve given out dough. But disputes over loan repayments in the so-called shadow banking system — with lenders that aren’t traditional banks — have mushroomed to a point that they’re clogging up Chinese courts, says Susan Finder, a Hong Kong-based legal expert on the Chinese court system. All told, more than 1 million cases related to shadow banking went through the courts last year, amounting to a fifth of all civil cases heard, while cases involving loan disputes have doubled between 2007 and 2013. To avoid trouble, many borrowers just skip town.
But some folks are finding ways to reform this massive economy. In the past, for instance, credit information on bank customers stayed within the formal banking system, managed by the People’s Bank of China. Big private lenders had to do their own checks, with CreditEase, for one, maintaining thousands of workers just to look into local borrowers. Now there are plans for credit bureaus and Internet-only banking services.
Ant Financial, for example, had extended more than 1 million microloans — worth less than $150,000 each — by the end of last year and recently created a credit bureau called Sesame Credit. While the new business, along with seven potential rivals, is still awaiting final licensing, it claims to have China’s first point-scoring system to help make credit decisions or, say, authorize a car rental agreement without prior deposit. Its secret weapon? Ant is an affiliate of the e-commerce giant Alibaba, and it’s aiming to use all that payment data on hundreds of millions of Chinese who make purchases on Alibaba’s online marketplace. If that weren’t enough, Ant is also expanding into online banking with the launch of MyBank.
There are growing pains, of course, with setting up all this new infrastructure. With more than 1.1 million records, the Credit China site is a start, but the country’s big microfinance lenders, including Ant Financial and CreditEase, tell OZY they haven’t started using the database yet. And there’s no regulatory agency to monitor the burgeoning online lending market, Finder says, which might concern some consumers or businesses looking for an infusion of money.
It’s not like China is unique in this situation. The U.S. also lacks close regulation of its e-lending market, yet small companies are still harnessing Big Data to take on riskier customers that traditional banks won’t touch, says Karen Mills, former head of the U.S. Small Business Administration. And, in China, there’s been no sign of slowed growth without regulator scrutiny. According to an estimate from the Brookings Institution, a Washington, D.C.-based think tank, outstanding shadow banking loans in China grew from nearly $82 billion in 2002 to $3.9 trillion in 2013, while small-loan companies quadrupled in the four years leading to 2013, to $127 billion.
Indeed, Huang Yiping, a professor at Peking University’s National School of Development, has written in Caixin magazine about the possibility that the relative underdevelopment of the Chinese banking and financial system could give it a leg up on Internet financing based on Big Data. That’s because banks leave so many individuals and small companies unserved, while the country’s growing pool of online users — more than 600 million, so far — and the steady growth of data tools to control risk suggest plenty of growth ahead.