Continuing with our on-and-off coverage on the Chinese underground banking crisis, here’s just another shocking piece of news. In the epicentre, Wenzhou, QQ.com reports that 90% of families in Wenzhou are involved in underground banking.
In the face of high inflation and low deposit rates in the formal banking system, large number of these families are trying to seek higher yields, thus their money has find its way to the shadow banking system. As monetary tightening made credit less available in the formal banking system, businesses are forced to borrow from these underground credit system (which includes stuff like loan sharks, pawnshops and others that we have be talking about here time and again).
As these businesses start to fail and businesses owners start escaping because the interest rates are way too high in these underground lending, this is becoming an increasingly worrying development. Although the current epicentre is in Wenzhou, but these activities exist everywhere in China.
Last week, Dong Tao of Credit Suisse wrote in a note that the underground banking system is a time bomb, and pose a potentially more serious problem to the Chinese economy. Not only it is largely unregulated, the size of it can be :
We consider the informal lending market as the most likely short-term time bomb for the Chinese economy, possibly more abruptive and explosive than the local government debt situation. Given its underground nature, it is unclear when this time bomb may explode, but something is likely to happen over the next 12 months. Either Beijing takes pro-active and decisive measures to deal with the issue, or a mini-credit crisis is likely to emerge, in our judgment.
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