:00:00. > :00:00.ex-boyfriends about the history of violence against women. --
:00:00. > :00:00.ex-boyfriend who had a history of violence.
:00:07. > :00:10.Now, it is time for Talking Business With Linda Yueh.
:00:11. > :00:14.Could China have a banking crisis? Although its leaders will try to
:00:15. > :00:18.tackle the issue at the annual meeting of its less lecture, is it
:00:19. > :00:45.too late to do anything about shadow banks? -- Le ghost sure...
:00:46. > :00:51.Welcome to the programme. China has gone from a nation of savers to one
:00:52. > :00:56.repeat with borrowers. In the five years since the global crisis, debt
:00:57. > :01:01.has skyrocketed. Worryingly, borrowing is not from banks but from
:01:02. > :01:07.unregulated shadow banks. I went to find out the scale of the problem.
:01:08. > :01:14.It takes money to make money, they say. To keep up growth, China has
:01:15. > :01:19.relied on credit since 2008. It has led to an explosion of an regulated
:01:20. > :01:27.lending. Otherwise called the sinister sounding shadow banking.
:01:28. > :01:32.Shadow banking, on Rigoletto blending. By definition, no one
:01:33. > :01:39.knows the scale of the problem but estimates are the debt increases
:01:40. > :01:44.200% of GDP. No wonder people are wondering if shadow banks could
:01:45. > :01:48.bring down China. This is what the government is afraid of. Captured by
:01:49. > :01:54.CCTV, these investors lost their money to a bad loan and have taken
:01:55. > :02:04.matters into their own hands to get it back. For others, it is more of a
:02:05. > :02:08.quiet despair. Xia Hua does not want us to show her face. Attracted by
:02:09. > :02:12.higher interest rates than she would ever get from a bank, she lost her
:02:13. > :02:18.mother is like sending is -- life savings lending to a shadow banker.
:02:19. > :02:23.His business collapsed and he committed suicide. TRANSLATION: One
:02:24. > :02:29.I found out, could notch sleep at all for a few nights. -- I could not
:02:30. > :02:32.sleep at all. When we lent the money we thought it was a good investment
:02:33. > :02:43.because the interest rates were so high. I ask, does her mother no?
:02:44. > :02:47.TRANSLATION: And cannot tell my mum. She has high blood pressure and she
:02:48. > :02:52.cannot take such bad news. I will try everything to fill in the whole,
:02:53. > :03:00.even if I have to borrow money from other people. Like many others, she
:03:01. > :03:02.is enticed -- was enticed into an informal lending system which exists
:03:03. > :03:08.everywhere but is particularly a problem in China because of tight
:03:09. > :03:14.state control of credit. For private companies like this card
:03:15. > :03:23.factory, shadow loans are the only way they can grow. TRANSLATION:
:03:24. > :03:26.factory, shadow loans are the only The CEO tells me he pays 30%
:03:27. > :03:31.interest to borrow from shadow banks. TRANSLATION: We still prefer
:03:32. > :03:36.to use shadow banking as a way to get money and solve our business
:03:37. > :03:40.problems. It is efficient and quick even though the rate is higher than
:03:41. > :03:48.the banks. Could the factory survive if there was not shadow banking?
:03:49. > :03:53.Maybe we could still survive but we would have to do business on a
:03:54. > :04:02.smaller scale. We probably could not take on any big clients. The pyramid
:04:03. > :04:10.of debt has risen quickly. Two years ago, it came crashing down on
:04:11. > :04:14.China's east coast. There, 90% of companies borrow from shadow banks.
:04:15. > :04:21.More than half of households do, too.
:04:22. > :04:28.After the quiet crisis, when Joe is leading the nation in trying to
:04:29. > :04:33.register these loans. I was there on the first day of the amnesty but
:04:34. > :04:35.surprisingly, no shadow bankers or borrowers turned up. Despite the
:04:36. > :04:44.unpromising start, the lawmaker leading the charge says that they
:04:45. > :04:48.must do something. TRANSLATION: Shadow banking has reached a high
:04:49. > :04:51.level. Without any law and supervision such a huge amount of
:04:52. > :04:56.loans would pose a big threat. There is no supervision, before, during
:04:57. > :05:00.and after the loans are made. The government only steps in when the
:05:01. > :05:13.crisis happens. It is so risky and has caused many crises. At the Shark
:05:14. > :05:17.Bar, aptly named, I met A'Fu, an educator by day and shady lender by
:05:18. > :05:22.night. Regardless of the law, shadow bankers are seizing the opportunity.
:05:23. > :05:27.How do you see yourself? Some people say that shadow banking is
:05:28. > :05:32.destroying the economy and others say that without you, there would be
:05:33. > :05:36.no growth in China. TRANSLATION: If we can control the rest, we are
:05:37. > :05:41.helping the economy. Many businessmen need money urgently.
:05:42. > :05:46.Only by getting it from us can they do business. -- control the risk. We
:05:47. > :05:51.get a nice profit and they do business. It is good for the
:05:52. > :05:56.economy. If the system collapses, the best case is a government rescue
:05:57. > :06:01.which derails growth. The worst-case is that it bankrupts the nation.
:06:02. > :06:09.Either way, there is a quiet menace lying just underneath the surface of
:06:10. > :06:15.China's impressive growth. Can the problem of shadow banks be
:06:16. > :06:24.addressed? To find out, I asked two experts. A senior fellow at Renmin
:06:25. > :06:30.University, and a representative from Gavekal Dragonomics. Lovely to
:06:31. > :06:37.have you both with us. Can you start by asking the big question? How big
:06:38. > :06:42.a problem is shadow banking and could China's economy? It is
:06:43. > :06:50.becoming more serious in China. It could damage the Chinese economy and
:06:51. > :06:58.the financial reform here, if we would still allow them to continue
:06:59. > :07:03.without control, it could damage the system. But I think it is still
:07:04. > :07:08.under control. Do you agree that it is under control? It has been around
:07:09. > :07:13.a long time. Let me put some numbers to illustrate my points. Currently,
:07:14. > :07:20.shadow banking by our measurement accounts for 20% of the Chinese
:07:21. > :07:25.total credit. And the ratio is not that big, compared with other
:07:26. > :07:30.countries. But the growth rate is quite astonishing. By the end of
:07:31. > :07:40.2007, the number was close to 2%. Now we see 20%. So it is growing at
:07:41. > :07:45.an astonishing rate. The problem is that there is an inherent problem in
:07:46. > :07:47.China over the last decade, which is that the economy is reliant on
:07:48. > :07:53.credit growth. Both of you are saying that shadow banking has grown
:07:54. > :07:58.rapidly over the last few years. I suppose that leads to the next
:07:59. > :08:02.question. Which is, can it be reformed, can it be controlled? I
:08:03. > :08:11.think it can be reformed and controlled. As we say, the total
:08:12. > :08:21.percentage of the growth of shadow banking in China is under control.
:08:22. > :08:29.It has almost stopped in some provinces. But the potential of
:08:30. > :08:38.shadow banking in China is significant. There are still some
:08:39. > :08:49.markets here. I heard it said that shadow banking came from the shadow
:08:50. > :08:52.economy. In China, the shadow economy is growing strongly. Can it
:08:53. > :08:58.be reformed? Some of these companies, we do not have the data.
:08:59. > :09:03.The problem is that they are doing the same thing as traditional and
:09:04. > :09:10.King was. But the underlying capital is limited compared to traditional
:09:11. > :09:21.banking laws. You do not have banking licences. If you had to make
:09:22. > :09:30.a 100 Zhou Dewen loan, you would have to make... A bank making a 100%
:09:31. > :09:33.loan would have to hold 5%. The trust company will just lend out
:09:34. > :09:38.100. In that case, is there enough tracking of them to make sure that
:09:39. > :09:43.they can be readily did? That is what the government is trying to do
:09:44. > :09:47.right now. Yes, it is what they are trying to do but there is an
:09:48. > :09:53.intrinsic conflict between sharp credit growth and the slowing down
:09:54. > :09:58.of GDP growth. You do not think it is likely that they can? If they
:09:59. > :10:01.want to restrict the growth of shadow banking that means that
:10:02. > :10:09.credit growth will slow down more sharply and GDP growth will
:10:10. > :10:11.increase. Five or 6%. That would be very slow. Do you agree that the
:10:12. > :10:15.government might say they want to regulate it at either they cannot or
:10:16. > :10:23.it goes against their interests to slow down growth? Central government
:10:24. > :10:30.will want to control the risk. But local government, they are
:10:31. > :10:42.reluctant. There is one case in China, which says that these reforms
:10:43. > :10:45.show that a defeat is not a victory. We made no progress in reforming
:10:46. > :10:49.because the local interests of the government got in the way. A neat
:10:50. > :10:57.shadow banking. They do not want to put reform in place. The interest
:10:58. > :11:01.groups are so complex that not only do they affect the companies, but
:11:02. > :11:09.they dominate banking. They lend money to shadow bankers. Because
:11:10. > :11:14.they get high feedback. There is a well-known case of ICBC,
:11:15. > :11:17.state-owned, connected to one of these trust companies that make the
:11:18. > :11:22.loans. So it is all interconnected. But let me ask you, one of the big
:11:23. > :11:27.things, the big question surrounding shadow banks, if there is not the
:11:28. > :11:31.political will to regulate it, and there's a lot of natural demand for
:11:32. > :11:38.these loans, what if it all goes wrong? What if the entire shadow
:11:39. > :11:42.banking system leads to a banking crisis in China? Could that happen
:11:43. > :11:48.and what would be the consequences for China? So far, I think the
:11:49. > :11:54.probability of a general banking crisis in China is quite low. But
:11:55. > :11:59.since growth is quite high, it is not impossible in the next couple of
:12:00. > :12:07.years. We never know. But I think in the next two years, shadow banking
:12:08. > :12:13.will be regulated and under control. I think shadow banking will
:12:14. > :12:22.require the market to be limited. Because our GDP growth will be lower
:12:23. > :12:30.than ever before. Even 2% lower than 9% or 10%, no we will have 7.7%, and
:12:31. > :12:34.that would be lower. The interest rates required from shadow
:12:35. > :12:40.banking... The local government that grows GDP, they will demand also
:12:41. > :12:43.that it is moderated. So that it is not so progressive or aggressive.
:12:44. > :12:48.That could be good for the shadow banking reform. So your view is that
:12:49. > :12:54.as long as growth slows and demand slows, China could probably manage
:12:55. > :13:00.shadow banking. But if it cannot, will it have global consequences? I
:13:01. > :13:05.think it will damage the Asian financial market first. Will it be
:13:06. > :13:12.another Lehman Brothers? It could expand to European countries. China
:13:13. > :13:19.has close connections with American development. And that could also
:13:20. > :13:27.have another sub-prime crisis as its results. Could this be the next
:13:28. > :13:29.Lehman Brothers moment? I do not think so. I think the Chinese
:13:30. > :13:34.government has the ability to save any bank it once. I think there is
:13:35. > :13:38.another consequence which is that the credit expansion will stop and
:13:39. > :13:44.leveraging will happen, no matter what China once. The damage will be
:13:45. > :13:49.first on the Asian economies who have a lot of exposure from China,
:13:50. > :13:52.Taiwan, Korea, Malaysia. China is the largest trading partner for
:13:53. > :14:02.them. Australia, Brazil, South Africa, other major countries. The
:14:03. > :14:05.main exposure is property developers and coalminers. That represents the
:14:06. > :14:14.Chinese investment. If the investment demands drop sharply,
:14:15. > :14:21.demand from Brazil will also collapse. Finally, we have talked
:14:22. > :14:25.about shadow banking, and I'm just called to ask you both, flat-out,
:14:26. > :14:32.will China has a shadow banking crisis in the next five years? Yes
:14:33. > :14:37.no. -- yes or no. I do not believe we will have this crisis in the next
:14:38. > :14:40.five years but I think in China we will have another more serious
:14:41. > :14:44.challenge than shadow banking. I cannot say it will not happen this
:14:45. > :14:54.year but in five years, I do not know. A good note to end on. Thank
:14:55. > :14:58.you both. This issue will be centre of the annual meeting of the
:14:59. > :15:01.National People's Congress that started this week. This will be the
:15:02. > :15:08.first session in which the new Chinese leaders will specify how
:15:09. > :15:11.they achieve their aims that were outlined at the meeting last autumn.
:15:12. > :15:18.One key challenge will be addressing corruption.
:15:19. > :15:24.Damien Grammaticas reports. Rising China. This is a nation whose
:15:25. > :15:29.leaders are determined, unlike dynasty's past, not to lose their
:15:30. > :15:34.hold on power. Discontent is widespread. On
:15:35. > :15:39.Tiananmen Square this week, quickly quashed, the stifling of dissent
:15:40. > :15:44.getting tougher. A stone's throw away, the leaders
:15:45. > :15:51.paused to remember the 29 people killed in last weekend's attack he
:15:52. > :15:58.the city of Kunming. They see other threats to the party's power too. So
:15:59. > :16:03.they are pressing economic reforms into corruption: We'll energetically
:16:04. > :16:05.build a system for combatting corruption, resolutely investigate
:16:06. > :16:15.cases and penalise offenders without mercy.
:16:16. > :16:20.Dozens have been detained. That's how they gain authority. It's
:16:21. > :16:26.difficult to persuade other leaders, and how to make sure that the
:16:27. > :16:31.corruption campaign is not too excess excessive.
:16:32. > :16:40.Just three hours drive from the leader's meeting, "trust me, trust
:16:41. > :16:44.me", urges an official. But as in many parts of China, they say they
:16:45. > :16:49.don't trust him and they were forced to make way for development and had
:16:50. > :16:53.to leave their homes. The way China's system works means
:16:54. > :16:59.corruption exists at every level to really root it out will require deep
:17:00. > :17:03.seated reform, not just to high profile campaigns, the promises are
:17:04. > :17:09.raising expectation along the masses who feel cheat and left out. The
:17:10. > :17:14.question is, can he deliver? TRANSLATION: The policies have given
:17:15. > :17:19.us some hope. That's why we have starteded fighting for our rights.
:17:20. > :17:23.We want what we were promised. TRANSLATION: They beat us, used
:17:24. > :17:30.explosives to scare us. They haven't given us the money or the houses
:17:31. > :17:38.they promised. Then thugs blocked us as we tried to film the new flats.
:17:39. > :17:42.The elderly protesters were furious. Lop developer, one of China's
:17:43. > :17:49.largest, says it's paid the local government over $60 million for the
:17:50. > :17:53.land. But the money's gone. It's Ping's fear, corruption if unchecked
:17:54. > :17:59.threatening a crisis for China's commune US party.
:18:00. > :18:05.So, it's not just Shadow banks, there are numerous issues to
:18:06. > :18:11.address, including corruption and slowing economic growth. What could
:18:12. > :18:17.the Chinese legislator propose? I went to find out by speaking to
:18:18. > :18:29.someone who's been in China for a long time and has worked in the
:18:30. > :18:34.financial sector. What do we expect from the congress?
:18:35. > :18:37.We could follow on a continuing trend from last year. Many things
:18:38. > :18:48.have happened last year in terms of reform. The national people's
:18:49. > :18:54.congress will... This next is codifying into law the various
:18:55. > :18:57.things which the party's already, been addressing... We have seen
:18:58. > :19:02.movements in the privatisation of different sectors. We have seen the
:19:03. > :19:07.breaking up of of some of the state monopolies, and a lot more will
:19:08. > :19:12.come. The cutting back of power of a number of state entities, such as
:19:13. > :19:15.the developing reform commission to allow greater forces of market to
:19:16. > :19:20.play. That's been the real big theme
:19:21. > :19:25.hasn't it, greater competition, raising efficiency, helping gross. A
:19:26. > :19:30.lot of people will say, are these true reforms that will really raise
:19:31. > :19:33.productivity, or are they just a bit of lip service because Chinese
:19:34. > :19:38.growth is slowing, they need to do something. Will this be enough? It
:19:39. > :19:43.depends on how you address growth. You can have growth that is totally
:19:44. > :19:47.basically using investments to pump up, build more roads and highways.
:19:48. > :20:02.It's a question of quality of growth. I'm a firm believer that if
:20:03. > :20:08.growth is upped, 5% is fine. I think what will happen is a true reform.
:20:09. > :20:11.For those of us with our boots on the ground and doing this in
:20:12. > :20:15.practise, we are beginning to discover a lot of things that were
:20:16. > :20:20.shocking that were uncon-Sealable a year-and-a-half ago. Such as? The
:20:21. > :20:25.privatisation of the telecommunications sector. 11
:20:26. > :20:34.virtual private 4G licences have been issued in all kinds of domain
:20:35. > :20:41.for these basically beginning of the breaking up of the power to state
:20:42. > :20:47.monopoly in the Telecom sector and the banking sector. The online
:20:48. > :20:52.banking system? Yes. But do you think they could really do something
:20:53. > :20:57.about the state-owned banks? That's become an issue. Their dominance is
:20:58. > :21:03.one of the reasons why shadow banking formal lending has... They
:21:04. > :21:08.basically sit pretty and charge huge margins. The spread between loan and
:21:09. > :21:14.deposit is huge and it's the small savers who really have been beaten
:21:15. > :21:21.up in the process. But what Alibaba has done is to squeeze that margin.
:21:22. > :21:24.If all of this leads to first and foremost, higher efficiency among
:21:25. > :21:30.the banks in terms of their management and lowering the burden
:21:31. > :21:34.on the savers, something good has already occurred.
:21:35. > :21:40.I think these are things that I don't think Alibaba or Ten Cent
:21:41. > :21:44.develop the systems without a nod from the very top of the country
:21:45. > :21:48.because these cost them dearly in terms of investments as well and
:21:49. > :21:53.developing these programmes. So their must have had some hint
:21:54. > :21:59.that these things would be welcomed or be allowed and they did. And this
:22:00. > :22:06.is the first big legislative session under the new President and Premier.
:22:07. > :22:11.Do you think it's going to have some traits about it that would give, I
:22:12. > :22:17.don't know, businesses, foreign companies confidence that they are
:22:18. > :22:21.on the right track? OK - I would separate the two categories that you
:22:22. > :22:28.describe - business and foreign companies. Try knees companies have
:22:29. > :22:37.gotten beaten up when they go abroad. I think foreign companies
:22:38. > :22:42.are going to expect pretty stringent regulatory control by the
:22:43. > :22:47.Government. But the deregulation of the sectors is really taking place
:22:48. > :22:53.and it's taking place very rapidly, even the major oil companies are
:22:54. > :22:58.forced to come out with proposals for spinning off different
:22:59. > :23:04.operations and allowing private Capitol to come in. I think this
:23:05. > :23:07.session is not going to be marked by anything particularly significant
:23:08. > :23:12.but it's a continuation of a process that begun at the beginning of last
:23:13. > :23:17.year when the new administration began. For those of us who are
:23:18. > :23:24.practition practitioners in the field, we do see de deregulation,
:23:25. > :23:27.the loosening up of controls and lesser government interdepeerns
:23:28. > :23:34.taking place. That was Charles Liu. --
:23:35. > :23:39.interference. There's a lot for China to tackle in
:23:40. > :23:44.the coming week. Top of the agenda should be Shadow banking because it
:23:45. > :23:46.could pose a grave risk to the world economy.
:23:47. > :23:56.That's all we have time for this week. Check out the website and me
:23:57. > :24:02.on Twitter. Join us next week for more Talking Business with Melinda
:24:03. > :24:12.Yueh. -- with me, Linda Yueh. Pf
:24:13. > :24:14.Hello, it's been raining all day