A shadow banker and former central bank staffer has jumped to the defence of China's rich tapestry of non-bank lenders, claiming they're in better shape than the nation's mainstream banks and better placed to make safe loans.
Joe Zhang, effectively retired but still listed as chairman of Guangzhou-based Wansui Micro Credit Company, delivered an often controversial speech at the Foreign Correspondents Club in Hong Kong yesterday.
He was seeking to promote his book – Inside China’s Shadow Banking: The Next Subprime Crisis? – to which his answer appeared to be an unequivocal "no".
But his comments come at a sensitive time, after the Shanghai interbank offered rate (Shibor) – the rate at which banks lend to each other – hit a record high of 11% on Monday. It retreated to 7.2% on Wednesday, with the central bank saying it was prepared to relieve temporary liquidity shortages.
In the firing line has been China's growing army of shadow banks and wealth management products, which have been blamed for recent spikes in the country's interbank lending rates.
But Zhang argued these spikes are attributable to the lack of a strong retail presence in Chinese financial institutions, which he suggests are overly reliant on China's central bank. He also asserted that China’s shadow banks provide much needed short-term financial support to the country’s small and medium-sized enterprises, and in fact are in better shape than mainstream banks.
“Our assets are short-term loans to small businesses,” Zhang said. “It’s our capital, and we know the businesses personally, so we’re in a better position to make safe loans.”
Zhang went on to outline his book as the tale of an entry-level People’s Bank of China staffer, turned UBS China researcher, turned shadow banker – and now author.
He breaks non-bank lenders down into various categories – micro-credit lenders, pawn shops, guarantee companies, peer-to-peer lenders, trust companies, private equity and ‘curbside lenders’.
He argues that all of these groups’ assets are less risky than many of China’s banks, noting how his company, Wansui Micro, has 5% in non-performing loans but a return on equity of 14%.
Zhang also dismisses the notion that the potential bursting of China's property bubble would cause a blow-up in wealth management products, given that many of these products have property development projects as underlyings.
He argues that a bubble has been blown up through artificially low rates, and that had rates been allowed to float, investors might not have been so eager to invest in the first place.
He also sought to offer assurances that if wealth management products did suffer defaults, banks (the main distribution channel for WMPs) would likely step in to provide compensation.
But the audience was not without its sceptics. A Citic banker questioned shadow banks’ credit evaluation process, given that non-bank institutions do not have access to the China Banking Regulatory Commission ratings. Zhang replied: “We give them a good stare.”