How They Do It In Wenzhou
For the last 12-18 months, nothing has worried
Chinese markets so much as the build-up of local government debt
which financed the countercyclical 2008/09 infrastructure spending,
and the stock of npls that lending must inevitably breed.
And so to today’s developments in Wenzhou. Over
the last couple of months, focus has been trained on this city in
eastern Zhejiang because it is a famously entrepreneurial town, home
to both a swarm of financially suffering SMEs, and also to China’s
most prominent collection of private grey-market lending syndicates.
Most particularly, reports from the town have told how businessmen
have fled the city to escape the vast debts they owe to private
financiers.
Over the last couple of days, the story has moved
on dramatically, in a way which illustrates how China’s leadership
is likely to deal with the wider debt issues. It is probably not a
coincidence that this is emerging only a week after a visit by
Premier Wen Jiabao. One can follow the ‘fix’ that’s emerging
from various Chinese press outlets, from both the
‘alternative-official-policy’ instrument ofCaixin, to the
‘Voice of the Party’ Global Times.
The poster boy for Wenzhou’s
problems is Wang Xiaodong, a businessman who fled
town a few weeks ago, owing up to Rmb 1.2bn to private lenders. The
first bit of news, reported by Caixin, is that Wang is
back in Wenzhou, and apparently offering repayment with a 30%
haircut. But more interestingly still, he has also
produced a list of lenders, which prominently features 'government
workers who routinely conducted financial deals on the side’ by
recycling, and repricing, the privileged access to bank credit that
government and bank workers enjoy. ‘Wang kept a list of private
lenders, and a large proportion of the names on that list were civil
servants.' Also ‘the higher the administrator is in the ranks, the
greater the amount of bank loans.' His list is leverage for him over
his creditors, for the central authorities over Wenzhou powerbrokers;
and for Beijing’s market reformers vs the status quo.
Meanwhile, over in the 21st Century
Business Herald, it is reported (without attribution) that
China’s bank regulator (CBRC) has increased a loan quota for
Wenzhou by Rmb 100bn. In addition, Zhejiang is seeking Rmb 60bn yuan
in one-year bailout funds from the central bank. (Guangzhou Daily,
incidentally, directly queries 'rumours' of a 60bn yuan facility.)
Bottom line: Wenzhou’s financial markets will
get most of their money back but only in return for a highly
embarrassing admission that private banking markets depend on illicit
collusion between banks and officials. What will Beijing do with
this?
A commentary in today’s Global Times on
private banking gives us a clue. It reads: 'The interest rate
policy of the Chinese central bank has twisted the domestic financial
markets and kept money out of the banking sector, redirecting it to
private lending, which has in turn further shrunk bank lending. As
such, the govt should not clamp down on private lending directly, but
instead accelerate reform of the interest rate policy, while also
encouraging the establishment of more private banks to promote
healthy competition.’
Conclusion: This very public fix of Wenzhou's
problems suggests that China is now confident about dealing with its
wider debt problem, and that the end-game has begun, and that it may
involve significant bank market reforms and liberalization. This
should generate confidence that solutions are underway that will put
questions about bank stability behind us. More positive views should
flow in the following weeks and months.
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