Twice a year I travel to Jingmen in central China to visit myparents and siblings. Last week, I was there on a new mission: toreview the work of my sisters as shadow bankers.
Shadow banking is lending activities outside regular banks. Despitewhat some would say, it is a reputable business
My elder sister, Yuqing, 59, sells red bean cakes and other snacksin Maliang, a small town along Han River. She makes about 3,000yuan (HK$3,800) a month with the assistance of her husband, afarmer who ploughs land for neighbours with a tractor in spring andautumn. They manage to make ends meet but have saved very littlefor their retirement. As they have never had formal employment,they will have no social security to fall back on during theirretirement.Right after I became chairman of Wansui MicroCredit in Guangzhou in mid-2011, I had tried to talk my two sistersinto the same trade. Owing to a lack of experience, they refused.Six months ago, I finally figured out a way for them to activelyengage in shadow banking without it affecting their currentwork.
Yuqing's education was very limited as she only attended primaryschool during the Cultural Revolution. But she knows all ofMaliang's 2,000 residents and is able to judge the credibility ofits street vendors and store owners.
To play it safe, I gave her 200,000 yuan to try her hand at lendingsix months ago. In one week, she lent out all the money to fourstore owners. Encouraged and pleased, she borrowed 80,000 yuan fromher son, a migrant worker in Xiangtan, to increase her firepower.The new funds went to a fertiliser distributor, while her fourearlier customers were in catering, and sold solar heaters andelectrical goods.
Her loans were all long-term ones but recallable with a week'snotice. I asked her to take notes on all money inflows andoutflows. She charges 1 to 2 per cent a month, but is very flexibleif her customers pay slightly less, or a week later than scheduled.She is more careful about the return of her money than the returnon her money. She told me she wanted to reduce the interest ratesas one neighbour was planning to send her child to school inWuhan.
Maliang also has two banks and a credit union that are flexible intheir business approaches. But they are not able to meet all thedemand. Unlike formal lenders,
One of her neighbours, Fongjun, is also in the lending business.Three months ago, he pulled money from a quarry operator afterhearing about his gambling losses. Yuqing knew that the rumour wasuntrue and so lent him money to fill the gap.
My younger sister, Yunmeng, is a human resources manager at a powerplant. She makes 7,000 yuan a month, a big salary by localstandards. With her own savings and my money, she now has 4 millionyuan under management.
Seven years ago, she got burned in the stock market, and had, untilsix months ago, only invested in banks' wealth management products,which are essentially the banks' way to bypass the government capson interest rates. Currently, the government caps the interestrates on bank deposits at 3.3 per cent a year, but banks pay asmuch as 5 to 6 per cent on wealth management products.
Through my work, I found three trustworthy peer-to-peer lenders(P2P) on the mainland. Essentially, they match small savers andsmall borrowers through the internet, and stand in the middle tofacilitate transactions and manage risks for the savers.
I did a fair amount of due diligence on China Risk Finance, (fundedby a group of well-known American investors), Kaixindai (owned byChina Development Bank and Jiangsu's provincial government)and
At my urging, Yunmeng invested 4 million yuan through the three P2Poperators, and plans to roll over the money to new borrowersconstantly through the three platforms. She gets paid an annualinterest rate of 10 to 11 per cent for her risk-taking.
While the P2P operators are not legally allowed to guarantee thesafety of investors' money, they still find legitimate ways toachieve the same goal. For example, CRF charges borrowers a 5 percent risk premium and pools the money to compensate investors inthe event of a default. Yooli and Kaixindai, on the other hand,make small loans in partnerships with licensed micro-credit firms,and require their partners to guarantee the loans.
The borrowers in the P2P networks are similar to Yuqing'scustomers, but a bigger and growing percentage are youngwhite-collar workers who do not mind taking out a loan for a newcar or a holiday in the Philippines.
Banking on the mainland is seen as a complex business (it is) andsomething that governments like to meddle in (they do). However,despite that meddling, ordinary people can find a way to helpthemselves … sometimes in the shadows of the "real" banks.
Joe Zhang is a corporate adviser and the authorof