08/03/2014 Talking Business with Linda Yueh

ex-boyfriends about the history of violence against women. --

ex-boyfriend who had a history of violence.

Now, it is time for Talking Business With Linda Yueh.

Could China have a banking crisis? Although its leaders will try to

tackle the issue at the annual meeting of its less lecture, is it

too late to do anything about shadow banks? -- Le ghost sure...

Welcome to the programme. China has gone from a nation of savers to one

repeat with borrowers. In the five years since the global crisis, debt

has skyrocketed. Worryingly, borrowing is not from banks but from

unregulated shadow banks. I went to find out the scale of the problem.

It takes money to make money, they say. To keep up growth, China has

relied on credit since 2008. It has led to an explosion of an regulated

lending. Otherwise called the sinister sounding shadow banking.

Shadow banking, on Rigoletto blending. By definition, no one

knows the scale of the problem but estimates are the debt increases

200% of GDP. No wonder people are wondering if shadow banks could

bring down China. This is what the government is afraid of. Captured by

CCTV, these investors lost their money to a bad loan and have taken

matters into their own hands to get it back. For others, it is more of a

quiet despair. Xia Hua does not want us to show her face. Attracted by

higher interest rates than she would ever get from a bank, she lost her

mother is like sending is -- life savings lending to a shadow banker.

His business collapsed and he committed suicide. TRANSLATION: One

I found out, could notch sleep at all for a few nights. -- I could not

sleep at all. When we lent the money we thought it was a good investment

because the interest rates were so high. I ask, does her mother no?

TRANSLATION: And cannot tell my mum. She has high blood pressure and she

cannot take such bad news. I will try everything to fill in the whole,

even if I have to borrow money from other people. Like many others, she

is enticed -- was enticed into an informal lending system which exists

everywhere but is particularly a problem in China because of tight

state control of credit. For private companies like this card

factory, shadow loans are the only way they can grow. TRANSLATION:

factory, shadow loans are the only The CEO tells me he pays 30%

interest to borrow from shadow banks. TRANSLATION: We still prefer

to use shadow banking as a way to get money and solve our business

problems. It is efficient and quick even though the rate is higher than

the banks. Could the factory survive if there was not shadow banking?

Maybe we could still survive but we would have to do business on a

smaller scale. We probably could not take on any big clients. The pyramid

of debt has risen quickly. Two years ago, it came crashing down on

China's east coast. There, 90% of companies borrow from shadow banks.

More than half of households do, too.

After the quiet crisis, when Joe is leading the nation in trying to

register these loans. I was there on the first day of the amnesty but

surprisingly, no shadow bankers or borrowers turned up. Despite the

unpromising start, the lawmaker leading the charge says that they

must do something. TRANSLATION: Shadow banking has reached a high

level. Without any law and supervision such a huge amount of

loans would pose a big threat. There is no supervision, before, during

and after the loans are made. The government only steps in when the

crisis happens. It is so risky and has caused many crises. At the Shark

Bar, aptly named, I met A'Fu, an educator by day and shady lender by

night. Regardless of the law, shadow bankers are seizing the opportunity.

How do you see yourself? Some people say that shadow banking is

destroying the economy and others say that without you, there would be

no growth in China. TRANSLATION: If we can control the rest, we are

helping the economy. Many businessmen need money urgently.

Only by getting it from us can they do business. -- control the risk. We

get a nice profit and they do business. It is good for the

economy. If the system collapses, the best case is a government rescue

which derails growth. The worst-case is that it bankrupts the nation.

Either way, there is a quiet menace lying just underneath the surface of

China's impressive growth. Can the problem of shadow banks be

addressed? To find out, I asked two experts. A senior fellow at Renmin

University, and a representative from Gavekal Dragonomics. Lovely to

have you both with us. Can you start by asking the big question? How big

a problem is shadow banking and could China's economy? It is

becoming more serious in China. It could damage the Chinese economy and

the financial reform here, if we would still allow them to continue

without control, it could damage the system. But I think it is still

under control. Do you agree that it is under control? It has been around

a long time. Let me put some numbers to illustrate my points. Currently,

shadow banking by our measurement accounts for 20% of the Chinese

total credit. And the ratio is not that big, compared with other

countries. But the growth rate is quite astonishing. By the end of

2007, the number was close to 2%. Now we see 20%. So it is growing at

an astonishing rate. The problem is that there is an inherent problem in

China over the last decade, which is that the economy is reliant on

credit growth. Both of you are saying that shadow banking has grown

rapidly over the last few years. I suppose that leads to the next

question. Which is, can it be reformed, can it be controlled? I

think it can be reformed and controlled. As we say, the total

percentage of the growth of shadow banking in China is under control.

It has almost stopped in some provinces. But the potential of

shadow banking in China is significant. There are still some

markets here. I heard it said that shadow banking came from the shadow

economy. In China, the shadow economy is growing strongly. Can it

be reformed? Some of these companies, we do not have the data.

The problem is that they are doing the same thing as traditional and

King was. But the underlying capital is limited compared to traditional

banking laws. You do not have banking licences. If you had to make

a 100 Zhou Dewen loan, you would have to make... A bank making a 100%

loan would have to hold 5%. The trust company will just lend out

100. In that case, is there enough tracking of them to make sure that

they can be readily did? That is what the government is trying to do

right now. Yes, it is what they are trying to do but there is an

intrinsic conflict between sharp credit growth and the slowing down

of GDP growth. You do not think it is likely that they can? If they

want to restrict the growth of shadow banking that means that

credit growth will slow down more sharply and GDP growth will

increase. Five or 6%. That would be very slow. Do you agree that the

government might say they want to regulate it at either they cannot or

it goes against their interests to slow down growth? Central government

will want to control the risk. But local government, they are

reluctant. There is one case in China, which says that these reforms

show that a defeat is not a victory. We made no progress in reforming

because the local interests of the government got in the way. A neat

shadow banking. They do not want to put reform in place. The interest

groups are so complex that not only do they affect the companies, but

they dominate banking. They lend money to shadow bankers. Because

they get high feedback. There is a well-known case of ICBC,

state-owned, connected to one of these trust companies that make the

loans. So it is all interconnected. But let me ask you, one of the big

things, the big question surrounding shadow banks, if there is not the

political will to regulate it, and there's a lot of natural demand for

these loans, what if it all goes wrong? What if the entire shadow

banking system leads to a banking crisis in China? Could that happen

and what would be the consequences for China? So far, I think the

probability of a general banking crisis in China is quite low. But

since growth is quite high, it is not impossible in the next couple of

years. We never know. But I think in the next two years, shadow banking

will be regulated and under control. I think shadow banking will

require the market to be limited. Because our GDP growth will be lower

than ever before. Even 2% lower than 9% or 10%, no we will have 7.7%, and

that would be lower. The interest rates required from shadow

banking... The local government that grows GDP, they will demand also

that it is moderated. So that it is not so progressive or aggressive.

That could be good for the shadow banking reform. So your view is that

as long as growth slows and demand slows, China could probably manage

shadow banking. But if it cannot, will it have global consequences? I

think it will damage the Asian financial market first. Will it be

another Lehman Brothers? It could expand to European countries. China

has close connections with American development. And that could also

have another sub-prime crisis as its results. Could this be the next

Lehman Brothers moment? I do not think so. I think the Chinese

government has the ability to save any bank it once. I think there is

another consequence which is that the credit expansion will stop and

leveraging will happen, no matter what China once. The damage will be

first on the Asian economies who have a lot of exposure from China,

Taiwan, Korea, Malaysia. China is the largest trading partner for

them. Australia, Brazil, South Africa, other major countries. The

main exposure is property developers and coalminers. That represents the

Chinese investment. If the investment demands drop sharply,

demand from Brazil will also collapse. Finally, we have talked

about shadow banking, and I'm just called to ask you both, flat-out,

will China has a shadow banking crisis in the next five years? Yes

no. -- yes or no. I do not believe we will have this crisis in the next

five years but I think in China we will have another more serious

challenge than shadow banking. I cannot say it will not happen this

year but in five years, I do not know. A good note to end on. Thank

you both. This issue will be centre of the annual meeting of the

National People's Congress that started this week. This will be the

first session in which the new Chinese leaders will specify how

they achieve their aims that were outlined at the meeting last autumn.

One key challenge will be addressing corruption.

Damien Grammaticas reports. Rising China. This is a nation whose

leaders are determined, unlike dynasty's past, not to lose their

hold on power. Discontent is widespread. On

Tiananmen Square this week, quickly quashed, the stifling of dissent

getting tougher. A stone's throw away, the leaders

paused to remember the 29 people killed in last weekend's attack he

the city of Kunming. They see other threats to the party's power too. So

they are pressing economic reforms into corruption: We'll energetically

build a system for combatting corruption, resolutely investigate

cases and penalise offenders without mercy.

Dozens have been detained. That's how they gain authority. It's

difficult to persuade other leaders, and how to make sure that the

corruption campaign is not too excess excessive.

Just three hours drive from the leader's meeting, "trust me, trust

me", urges an official. But as in many parts of China, they say they

don't trust him and they were forced to make way for development and had

to leave their homes. The way China's system works means

corruption exists at every level to really root it out will require deep

seated reform, not just to high profile campaigns, the promises are

raising expectation along the masses who feel cheat and left out. The

question is, can he deliver? TRANSLATION: The policies have given

us some hope. That's why we have starteded fighting for our rights.

We want what we were promised. TRANSLATION: They beat us, used

explosives to scare us. They haven't given us the money or the houses

they promised. Then thugs blocked us as we tried to film the new flats.

The elderly protesters were furious. Lop developer, one of China's

largest, says it's paid the local government over $60 million for the

land. But the money's gone. It's Ping's fear, corruption if unchecked

threatening a crisis for China's commune US party.

So, it's not just Shadow banks, there are numerous issues to

address, including corruption and slowing economic growth. What could

the Chinese legislator propose? I went to find out by speaking to

someone who's been in China for a long time and has worked in the

financial sector. What do we expect from the congress?

We could follow on a continuing trend from last year. Many things

have happened last year in terms of reform. The national people's

congress will... This next is codifying into law the various

things which the party's already, been addressing... We have seen

movements in the privatisation of different sectors. We have seen the

breaking up of of some of the state monopolies, and a lot more will

come. The cutting back of power of a number of state entities, such as

the developing reform commission to allow greater forces of market to

play. That's been the real big theme

hasn't it, greater competition, raising efficiency, helping gross. A

lot of people will say, are these true reforms that will really raise

productivity, or are they just a bit of lip service because Chinese

growth is slowing, they need to do something. Will this be enough? It

depends on how you address growth. You can have growth that is totally

basically using investments to pump up, build more roads and highways.

It's a question of quality of growth. I'm a firm believer that if

growth is upped, 5% is fine. I think what will happen is a true reform.

For those of us with our boots on the ground and doing this in

practise, we are beginning to discover a lot of things that were

shocking that were uncon-Sealable a year-and-a-half ago. Such as? The

privatisation of the telecommunications sector. 11

virtual private 4G licences have been issued in all kinds of domain

for these basically beginning of the breaking up of the power to state

monopoly in the Telecom sector and the banking sector. The online

banking system? Yes. But do you think they could really do something

about the state-owned banks? That's become an issue. Their dominance is

one of the reasons why shadow banking formal lending has... They

basically sit pretty and charge huge margins. The spread between loan and

deposit is huge and it's the small savers who really have been beaten

up in the process. But what Alibaba has done is to squeeze that margin.

If all of this leads to first and foremost, higher efficiency among

the banks in terms of their management and lowering the burden

on the savers, something good has already occurred.

I think these are things that I don't think Alibaba or Ten Cent

develop the systems without a nod from the very top of the country

because these cost them dearly in terms of investments as well and

developing these programmes. So their must have had some hint

that these things would be welcomed or be allowed and they did. And this

is the first big legislative session under the new President and Premier.

Do you think it's going to have some traits about it that would give, I

don't know, businesses, foreign companies confidence that they are

on the right track? OK - I would separate the two categories that you

describe - business and foreign companies. Try knees companies have

gotten beaten up when they go abroad. I think foreign companies

are going to expect pretty stringent regulatory control by the

Government. But the deregulation of the sectors is really taking place

and it's taking place very rapidly, even the major oil companies are

forced to come out with proposals for spinning off different

operations and allowing private Capitol to come in. I think this

session is not going to be marked by anything particularly significant

but it's a continuation of a process that begun at the beginning of last

year when the new administration began. For those of us who are

practition practitioners in the field, we do see de deregulation,

the loosening up of controls and lesser government interdepeerns

taking place. That was Charles Liu. --

interference. There's a lot for China to tackle in

the coming week. Top of the agenda should be Shadow banking because it

could pose a grave risk to the world economy.

That's all we have time for this week. Check out the website and me

on Twitter. Join us next week for more Talking Business with Melinda

Yueh. -- with me, Linda Yueh. Pf

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