There's A Much Bigger Underground Banking Crisis Brewing In Ordos

ordosA vacant development in Ordos

Wenzhou, a city on the east coast of China, is crumbling under pressure from high interest black market loans.Ordos, a city in Inner Mongolia, was identified as the next outbreak of the underground banking crisis.

For now Ordos is in better shape than Wenzhou for one simple reason: mining profits haven’t crashed. Caixin’s Yi Peng writes:

The private lending situation is different in Ordos as compared to Wenzhou, because a portion of the high-interest loans in Ordos has been invested in coal fields and other energy-related sectors. As a result of the current power shortage in much of China, the demand for coal is not likely to change in the short term, guaranteeing high prices and high profits in this industry. During the first three quarters of this year, Ordos produced 420 million tons of coal (a year-on-year increase of 41 per cent), while profits in the coal industry reached 80 billion yuan (a year-on-year increase of 38.5 per cent). This means that at the very least, cash flow investment in this sector is guaranteed. The situation is different in Wenzhou, where the economy is built on light manufacturing products such as lighters and shoes, and where profit margins are relatively thin. Naturally, it is difficult to sustain such high-interest payments.

In the near future, however, Ordos could be a bigger crisis. Yi Peng points to the boom (and bust) times ahead:

First, the government plans to promote the development of the so-called “Golden Energy Triangle”: Ningxia, Ordos, and Yulin. Given the energy industry’s high profits, Ordos and its surroundings will inevitably attract more and more capital. But Ordos and Wenzhou are different. Aside from the energy sector, Ordos is not particularly developed in any other sectors, especially in the services industry. Without systemic innovation, once Ordos has finished processing these capital investments, the consequences will be more serious.  

Second, Ordos, in northwestern China, has always lacked financial support. Wenzhou is located near national financial centres such as Shanghai, and regional financial centres such as Ningbo and Hangzhou. Northeastern China is comparatively much less developed. To create balanced development throughout China, the northeast needs a regional financial centre. As a city with huge amounts of private capital, Ordos can play a major role.  

Lastly, Ordos lacks water, which means that large-scale industrial development will inevitably run into a bottleneck. The population is relatively small; the city has less than 100 million inhabitants. Other than the energy industry, Ordos should focus on developing non-labour intensive industries, and the financial sector fits this requirement.

Developments around Ordos are already known as ghost cities, where entire skyscrapers are uninhabited.

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