More proof that markets abhor a vacuum.
While we seem to be getting mixed signals about the real credit conditions in China, where I suspect that lending growth has been happening among State Owned Enterprises (SoE) but may have been contracting in the private sector due to the overleverage in the shadow banking system (mostly from financial vehicles setup by regional authorities), many of the average Chinese seems to be exploring direct credit transactions via the internet: Peer to Peer lending.
From Bloomberg,
Peer-to-peer lending is taking off in China as traditional methods of private lending among family and acquaintances, part of the country’s unregulated $2.4 trillion shadow-banking system, move online. More than 2,000 websites have been set up nationwide since 2007, China National Radio reported in May. Loans brokered online increased 300-fold to 6 billion yuan in the first half of 2011, the latest figures available, from the full year total in 2007, the report said.
’Innovative Lending’
Akin to LendingClub.com or Prosper.com in the U.S., China’s peer-to-peer lenders let individuals invest a minimum of 50 yuan in projects ranging from small-business expansion to funding newlyweds’ honeymoons for as much as 23 percent interest, the highest rate allowed under Chinese law. While the returns are higher than parking the money in bank accounts earning 3 percent, they’re dwarfed by some underground shadow-banking investment yields that can go as high as 100 percent.
“This is an interesting and innovative lending platform with a lot of goodwill,” said Liao Qiang, a Beijing-based director for financial institutions at Standard & Poor’s.
Existing outside of regulators’ jurisdiction, online lending sites aren’t without risks. The China Banking Regulatory Commission in September issued a warning about web-based brokers, cautioning that their bad-loan ratio is “significantly higher” than that of banks -- without specifying the figure -- and that they can cross the line into illegality such as fraud, funding illegitimate businesses or money laundering.
A Beijing-based spokesman for the banking regulator said peer-to-peer lending isn’t under its official purview.
“There is no discipline at all,” Liao said, calling it a “short-lived fad” that won’t affect the role banks play in the economy. “There’s no enforcement should borrowers default.”
P2P lending will hardly be a short-lived fad, as they are in reality representative of free markets and of the deepening trend of the information age.
It’s bizarre how the mainstream talks about the paucity of discipline when today’s over-indebted shadow banking in China has mainly been fueled by reckless local government units in pursuit of political goals. China’s shadow banking industry consists of the investment trust industry, pawn shops, guarantors, underground banks and wealth management products.
Politicians and their apologists always try to shift the blame on markets the monsters which are, in reality, products of their self-creation.
Eventually P2P credit markets will get significant volume enough to challenge the conventional banking and financial industries, where the latter would seek interventions to curb competition. Don’t forget that conventional banking and governments will strive to uphold their symbiotic relationship which has been backed by the central bank.
Nonetheless, again China’s blossoming P2P credit markets are growing evidences of the deepening of the information age and of the parallel free markets (free banking?) that can be accessed, in case the conventional political- interdependent banking system undergoes a seizure (similar to Lehman episode of 2008). if not a collapse.
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