Underground banking in China
Saturday, May 29, 2010 at 12:04AM 
Interesting FT piece on the underground banking in China known as minjian jeidai.
Basically it's Chinese companies borrowing short-term money from wealthy households instead of banks via a broker. Households want better opportunities to use their investment money and banks find it hard to get such loans from banks, so everybody happy!
The problem is that anything that unregulated can have surprising impact, depending on the size of the flow, which nobody really knows. Some bankers guess it's equal to about 10% of any locality's ongoing finance.
Point of piece by Gillian Tett: compared to the now vilified West, China's state capitalism isn't exactly lacking in unregulated financing, and it's overall lack of financial transparency suggests that underground banking may be just a fraction of what we don't know.
Bottom line: lots of bets being placed on future Chinese growth, even though "very few western investors really know that much about what is--or is not--happening at the grass roots in China now."
Not all that different from the US housing market five years ago, she ends.
Sobering thought.
Reader Comments (1)
A lot of this also happens in Iran, where investors enjoy up to 18% interest rates on their principal from private corporations where as if they were to put their large sums in a federal back, they would only get back up to 8% (which is still larger than the percentages offered in North America). This trend however, declined sharply right before the contested elections in Iran, since it took a little bit of time for the financial crisis to hit that country. Since a lot of the investments are with companies that do business on an international level (Middle east, Turkey, Europe) the lowered confidence levels resulted in investors not being able to pay back interests or in some cases even the principle sum.