Chinese Flee Formal Banking
The friends often lend each other large amounts on the strength of a handshake and a handwritten i.o.u. Both sides then go to an automated teller machine or bank branch to transfer the money, which is then withdrawn from the bank. Or sometimes they do it the old-fashioned way: exchanging burlap sacks stuffed with cash.
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The worry for Chinese regulators is that everyone in China will start cooking the Wenzhou stir-fry and do it outside the banking system. In the last few months, borrowing and lending across the rest of China is looking more and more like Wenzhou’s. The growth of this shadow banking system poses a stiff challenge to China’s state-owned banks, already burdened with bad debt, and makes it harder for the nation’s leaders to steer a fast-growing economy.
Great article, if you can get by the Times’ statist bias that free banking must be bad, and regulation, even when its opaque, oppressive, and full of bias, must be good.
(From the New York Times, Informal Lenders in China Pose Risks to Banking System.)
The article calls into question the legitimacy of the ‘formal’ banking system; particularly when it contrasts the quality of the loans generated by the two systems. In one system cheap money is lent at below market rates to poor payers while in the other system money is lent at market rates to finance sensible projects.