China Admits To $470 Billion In Its Underground Banking System

China magazine vendor

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In a closed-door government meeting, China Banking Regulatory Commission chairman Liu Mingkang announced that $470 billion was moving through so-called “black” banks in the country’s Eastern provinces alone, according to Asia Times Online.As Beijing tightens credit, small private businesses are having trouble getting loans. As a result, they’re turning to unofficial sources to stay afloat, some even becoming lenders themselves.

In Zhejian Province, for example, 80% of private companies are using unofficial loans to fund their operations even as underground lenders have raised their interest rates by as much as 10%, says a spokesman of the Zheshang Research Association.

It makes sense for private companies to turn away from the official banking sector. Large, state-owned companies can borrow at interest rates of 7.2% Smaller, private companies are looking at rates from 36% to 60%. The larger companies then contribute to the problem by lending to smaller companies at lower rates.

On the surface, though, China’s measures to slow loans (to curb inflation) seem to be working. Year-over-year, July new yuan loans fell by 25.2 billion yuan to 492.6 billion yuan. But then again, we can only make educated guesses as to what’s in the black.