You are on page 1of 6

28 September 2011 Economics Research

http://www.credit-suisse.com/researchandanalytics

China: Rising risk in informal lending
Economics Emerging Markets
Research Analysts Dong Tao +852 2101 7469 dong.tao@credit-suisse.com

• Informal lending has surged in China, as real estate developers and SMEs that could not get bank loans have turned to the curb market, paying a reported annualized lending rate of 14%-70% for loans. • There are no hard statistics on the total amount of informal lending. The CBRC has suggested it is about RMB3trn, while we estimate it could be as much as RMB4trn, or 8% of the formal lending market, and may be growing by over 50% yoy. • Banks, large SOEs, private entrepreneurs and individuals are all involved in this lending practice, attracted by the high ‘guaranteed’ returns. Guarantors, as intermediates, play a critical role in making the deals. • We estimate that 60% of informal loans have gone to small developers, who have refused to cut property prices in the hope that Beijing’s housing policy will be reversed soon. 20%-30% of lending is to ‘real businesses’ in the form of ’bridge loans’. • The loans to developers are at risk, in our view, as developers’ cash flows could become very stretched if home transaction volumes do not pick up soon. We do not anticipate any policy easing by Beijing. • This wild wave of nationwide informal lending could cause major problems, if it is not handled carefully and proactively by the government. Due to its underground nature, informal lending is harder to monitor, manage and fix than formal lending.

Exhibit 1: Developers and SMEs have borrowed expensively in the informal lending market
8 7 6 5 4 3 2 1 0 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Aug-11 Sep-11 6% Curb market lending rate in Wenzhou (% per month)

Source: Local newspaper in Wenzhou, Credit Suisse

ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.

in our view.000 31. there is a wide range of lending behavior.000 35.000 39.28 September 2011 The rise of the informal lending market Informal lending (or shadow banking) has surged in China over the past 12 months. but the assumption of a high level of risk is a common characteristic. guarantee companies. Parties involved in informal lending are so widespread that it would not be much of an exaggeration to call it a nationwide lending campaign. Instead. pawnshops. but the SOEs lacked compelling investment opportunities.000 31. Credit Suisse The informal lending market appeared to take off in 2010 after private entrepreneurs had sold their manufacturing businesses or real estate properties but were not keen to invest the money back into ‘real businesses’ again or put the money on deposit at the banks.000 37. or about 8% of formal lending by banks. many large SOEs started to engage in lending business too. one way or another. Of course. investment guarantor companies. and sometimes subject to criminal punishment. In 2011.000 29. operational styles and ownership patterns. Credit Suisse Source: PBoC. individuals are desperate for yields as bank deposits offer steep negative real interest rates.500 32. There is a long chain of parties related to the informal lending business that includes banks. Because the lenders are often not familiar with the borrowers.500 Mar-11 May-11 Jan-11 Apr-11 Feb-11 Jun-11 Aug-11 Jul-11 Exhibit 3: Banks have continued to provide ‘cheap’ credit to the SOEs 41. SOEs. Exhibit 2: The deposit base has shrunk in recent months 33.000 25. Hence. Banks continued to put cheap credit in the hands of the SOEs.000 30. threatening financial stability.500 31. a coastal city in Zhejiang province and an industrial hub.500 33. SOEs have added an interest rate spread on the credit they obtained and have lent the money out to other parties. These are underground activities. as most such activity is done without licenses and in violation of the regulations. through their financial arms. to informal lending. The chairman of the China Banking Regulatory Commission has mentioned that the amount of informal loans totals about RMB3trn. the proceeds were often put into short-term lending.000 Mar-09 Mar-10 May-09 May-10 Mar-11 May-11 Jan-09 Jan-10 Nov-09 Nov-10 Sep-09 Sep-10 Jan-11 Jul-09 Jul-10 Jul-11 China: Saving deposits (RMB bn) Use of credit fund: Non-financial institutions and other sector (RMB bn) Source: PBoC.000 27. who brokes the 2 China: Rising risk in informal lending . and we estimate it is probably nearer to RMB4trn. typically receiving 6%-8% ’guaranteed’ annual returns.000 23. were all related. Among the informal lenders. funding sources. entrepreneurs and individuals. Many depositors have pulled their money out of the formal deposit system and have lend it out in the informal sector.000 33. there are few hard data about informal lending. while transaction volumes in property and equity markets are shrinking. it was reported that about a dozen company failures in Wenzhou. As an illustration of and warning about the risks presented by this unregulated activity. Judging from the pace of the decline in banking sector deposits. In the meantime. in our view. we think informal lending has been growing by around 50% year on year since the beginning of this year. a lending deal typically involves a guarantor.000 32.

but in most cases they are companies. and about 20% by individuals. 20% by private entrepreneurs. many smaller developers will likely collapse over the next six months. with required reserves ratio hikes and tightened loan quotas. the large SOEs. 3w mav Exhibit 5: …while inventory levels are rising 25 20 15 11 10 5 0 Apr-09 Apr-10 Jan-09 Jan-10 Primary + Secondary residential property sales Beijing Shenzhen China property inventory months 14000 12000 10000 8000 6000 4000 2000 0 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Source: Soufun. The PBoC has been taking a one-size-fits-all approach by conducting quantitative tightening. in our view. typically borrowed from a bank. Credit Suisse Source: Soufun.com. This approach has resulted in the creation of a liquidity shortage in the banking system. As a result. forcing them to turn to the informal lending market. usually takes 3%-4% of the total lending amount as a commission.. Actual lending rates have become much higher than official lending rates. a critical deal maker. we believe the expansion of the informal lending market is a result of the fact that the formal lending institutions have partially failed to fulfill their role as financial intermediaries. Interest rates and exchange rates have been left largely untouched. The shareholders of the guarantor companies usually have RMB100mn-RMB200mn of equity. We estimate that about 60% of lending in the informal market is ultimately funded by banks through various channels (lending to SOE parent companies. in our view. the price signals for capital allocation have been distorted.e. but they are relatively small in aggregate. They pay interest rates ranging between 14% and 70% on an annualized basis. with several SOEs as their shareholders. In sum. They are generally refusing to cut prices at a time when transaction volumes have fallen sharply. Credit Suisse The lending to property developers is a particular concern. for example). counting on the hope that the government’s tightening policy will be eased soon.28 September 2011 deal and guarantees that the loan will be paid back on time. i. About 20%-30% of informal lending has been channeled to real businesses. Jan-11 Apr-11 Oct-08 Oct-09 Oct-10 Jul-08 Jul-09 Jul-10 China: Rising risk in informal lending 3 . Exposure to the property sector is a concern We believe that about 60% of the informal lending has been channeled into the property sector. in our view. is a direct result of monetary policy failure. The guarantors are sometimes connected with banks. Most Chinese developers have never experienced a bear market cycle. but the actual number could be ten times higher.000 guarantors are registered in China. Pooled money investments in specific projects are a variation. The biggest borrowers are the small or medium-sized real estate developers. Guarantors could be credible individuals. in our opinion. usually serving as ‘bridge loans’ before the actual payments are received. About 6.com. Exhibit 4: Property transactions are falling… Unit s sold per week. If Beijing’s housing policy is not reversed quickly. Tightened credit conditions are the driver The surge of informal lending. Since banks still want to serve their best customers. The guarantor. many SMEs and property developers have been cut from their client lists.

or a mini-credit crisis could occur. We consider the informal lending market as the most likely short-term ‘time bomb’ facing the Chinese economy.28 September 2011 Exhibit 6: RRR hikes have curbed banks’ liquidity… 25 20 15 10 5 0 1990 1993 1996 1999 2002 2005 2008 2011 Exhibit 7: …pushing up the informal lending rate 8 Curb market lending rate in Wenzhou (% per month) China: Reserves requirement ratio (%) 21. the authorities probably do not even know how to contact the lenders and borrowers. Given its underground nature. affecting corporate balance sheets. we believe it is harder to monitor. China: Rising risk in informal lending 4 . which could possibly be more abrupt and damaging than the local government debt situation. If the debt chain were to face unexpected turbulence. but we believe something is likely to happen over the next 12 months. Credit Suisse Unlike the official lending market.5 7 6 5 4 3 2 1 0 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Aug-11 Sep-11 6% Source: PBoC. Either Beijing takes proactive and decisive measures to deal with the issue beforehand. It is unclear whether this ‘time bomb’ will go off. consumer confidence and bank asset quality. If one link in the chain fails. we believe that China would likely face a credit crunch that could significantly undermine its growth prospects and investor confidence. in our view. The widespread nature of informal lending practices also means that risks could quickly spread to every corner of the economy. In the event of a crisis. the entire debt chain is likely to collapse. the informal lending market usually has a long debt chain. Credit Suisse Source: Local newspaper in Wenzhou. We also think Beijing has a very limited ability to monitor this activity. to manage and to cure.

Ukraine.com India.voloboev@credit-suisse.EMERGING MARKETS ECONOMICS AND FIXED INCOME STRATEGY Kasper Bartholdy Head of Strategy and Economics +44 20 7883 4907 kasper.rabelo@credit-suisse.sathirathai@credit-suisse.parsons@credit-suisse.com . El Salvador Lorraine White +1 212 538 4311 lorraine.mustafayev@credit-suisse. CFA +1 212 538 8889 helen. Colombia Casey Reckman +1 212 325 5570 casey.siddiqui@credit-suisse.hudecz@credit-suisse.com Eric Miller.com Brazil Tales Rabelo +55 11 3841 6353 tales.com Helen Parsons. Peru.miller.com Research Analyst Iana Ferrao +55 11 3841 6345 iana. Chile Nilson Teixeira Head of Brazil Economics +55 11 3841 6288 nilson.white@credit-suisse.com Thailand.com Carola Sandy +1 212 325 2471 carola.com Alexey Pogorelov +7 495 967 8772 alexey.mehndiratta@credit-suisse.com Saad Siddiqui +44 20 7888 9464 saad.reckman@credit-suisse.com Czech Republic. Poland Sergei Voloboev +44 20 7888 3694 sergei.com Paul Fage Head of EMEA Strategy +44 20 7883 7994 paul.cervera@credit-suisse. MIDDLE EAST & AFRICA ECONOMICS Berna Bayazitoglu Head of EMEA Economics +44 20 7883 3431 berna. Vietnam Kun Lung Wu +65 6212 3418 kunlung.tao@credit-suisse.ferrao@credit-suisse.bartholdy@credit-suisse.com Russia.com Turkey Gergely Hudecz +44 20 7883 9589 gergely.com India.com Venezuela.priorwandesforde@creditsuisse.com Latam Local Markets Strategy Ray Farris Head of FX Strategy +65 6212 3412 ray.farris@credit-suisse.com Brazil Leonardo Fonseca +55 11 3841 6348 leonardo.com Strategy Daniel Katzive +1 212 538 2163 daniel.com Hong Kong.fonseca@credit-suisse.katzive@credit-suisse.3@credit-suisse.balster@credit-suisse.teixeira@credit-suisse.pogorelov@credit-suisse.com Mexico.wu@credit-suisse.sandy@credit-suisse. Korea Robert Prior-Wandesforde +65 6212 3707 robert.com LATIN AMERICA ECONOMICS Alonso Cervera Head of Non-Brazil Latin America Economics +52 55 5283 3845 alonso.com Russia. CFA Locus Analytics Specialist +1 212 538 5889 chris.com South Africa.chodos@credit-suisse. Nigeria Natig Mustafayev +44 20 7888 1065 natig.com Israel.com China.bayazitoglu@credit-suisse. Romania Carlos Teixeira +27 11 012 8054 carlos.teixeira@credit-suisse.com FX Strategy Ashish Agrawal Asia Strategy +65 6212 3405 ashish.com Daniel Chodos +1 212 325 7708 daniel. Ukraine. Singapore STRATEGY Igor Arsenin Head of Latin America Strategy +1 212 325 6437 igor. Taiwan Devika Mehndiratta +65 6212 3483 devika.com Brazil Daniel Lavarda +55 11 3841 6352 daniel.com Strategy Chris Balster.com Argentina. Panama. Philippines Santitarn Sathirathai +65 6212 5675 santitarn.tuntono@credit-suisse.com Brazil EASTERN EUROPE.mevorach@credit-suisse.lavarda@credit-suisse. Kazakhstan NON-JAPAN ASIA ECONOMICS Dong Tao Head of Non-Japan Asia Economics +852 2101 7469 dong.com Malaysia. Indonesia Christiaan Tuntono +852 2101 7409 christiaan.agrawal@credit-suisse. Hungary. Kazakhstan Nimrod Mevorach +44 20 7888 1257 nimrod.fage@credit-suisse. Managing Director Global Head of Fixed Income and Economic Research +1 212 538 6480 eric.arsenin@credit-suisse.

Municipalities should consult with their financial. or other material interest. websites. is made regarding future performance. or currently may make a primary market in issues of.credit-suisse. Investors in securities such as ADR’s. nor its content. subject to duties of confidentiality. the information presented in this report. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Dong Tao. participate or invest in financing transactions with the issuer(s) of the securities referred to in this report. in the case of some investments the potential losses may exceed the amount of initial investment and. CS has not reviewed any such site and takes no responsibility for the content contained therein. In addition. employees or agents thereof) and CS for CS to provide advice to the municipality. CS may provide various services to US municipal entities or obligated persons ("municipalities"). This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available. accounting or tax advice. which is regulated in the United Kingdom by The Financial Services Authority (“FSA”). but not limited to. is under copyright to CS. publication. and reach different conclusions from. in Japan by Credit Suisse Securities (Japan) Limited. Past performance should not be taken as an indication or guarantee of future performance. Singapore Branch. Non-U. None of the material. Research on Taiwanese securities produced by Credit Suisse AG. Japanese corporate bonds) from CS as a seller. Accessing such website or following such link through this report or CS’s website shall be at your own risk. Type II Financial Instruments Firms Association. value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. or a representation that any investment or strategy is suitable or appropriate to your individual circumstances. Credit Suisse AG. direct or indirect. The Financial Futures Association of Japan. the issuance of municipal securities. dealer. a member of Japan Securities Dealers Association. Structured securities are complex instruments. may be altered in any way. in Switzerland by Credit Suisse AG. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited. Financial Instruments Firm. any person or entity who is a citizen or resident of or located in any locality. This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC. Income yields from investments may fluctuate and. availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates (“CS”) to any registration or licensing requirement within such jurisdiction. and may in the future issue. effectively assume this risk. or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). any or all of the entities mentioned in this report or may be providing. Japanese government guaranteed bonds. in consequence. Disclaimer References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse AG operating under its investment banking division. The information. This report is not directed to. elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited. CS may. Such address or hyperlink (including addresses or hyperlinks to CS’s own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U. and further details as to where this may be the case are available upon request in respect of this report. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable. When you purchase non-listed Japanese fixed income securities (Japanese government bonds. time to maturity. but CS makes no representation as to their accuracy or completeness. spot and forward interest and exchange rates). Director-General of Kanto Local Finance Bureau (Kinsho) No. In jurisdictions where CS is not already registered or licensed to trade in securities. there is no agreement. Japan Securities Investment Advisers Association. transactions will only be effected in accordance with applicable securities legislation. is or will be directly or indirectly related to the specific recommendations or views expressed in this report. unless specifically indicated otherwise. Care is required when investing in such instruments. Some investments may not be readily realisable and it may be difficult to sell or realise those investments. to whom they should direct any queries on +603 2723 2020. or have provided within the previous 12 months. or intended for distribution to or use by.A. in such securities or options thereon. The price. For more information on our structure. All material presented in this report. or of an investment adviser to provide investment advisory services to or on behalf of the municipality. similarly it may prove difficult for you to obtain reliable information about the value. accounting and legal advisors regarding any such services provided by CS. London E14 4QJ. or contain hyperlinks to. typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. you may be required to pay more money to support those losses. which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. or risks. tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. Those losses may equal your original investment. views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's market professional and institutional clients. including suggesting individual transactions or trades and entering into such transactions. other reports that are inconsistent with. to which such an investment is exposed. . Taipei Branch has been prepared by a registered Senior Business Person. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS. Nothing in this report constitutes investment. Japanese municipal bonds. there are bonds on which investment principal can be eroded due to changes in redemption amounts. Additional information is.S. In connection with the provision of the any such services. or other investments related thereto. Investment principal on bonds can be eroded depending on sale price or market price. it may make markets in the securities mentioned in the material presented in this report. the values of which are influenced by currency volatility. All trademarks. municipal securities dealer. 66. Credit Suisse Equities (Australia) Limited. Some investments discussed in this report may have a high level of volatility. S.com/who_we_are/en/. CS is providing any such services and related information solely on an arm’s length basis and not as an advisor or fiduciary to the municipality. service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. This report may provide the addresses of. Indeed. Credit Suisse Securities (Thailand) Limited. legal. to the extent permitted by law. financial and political factors (including. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. The market value of any structured security may be affected by changes in economic. and the credit quality of any issuer or reference issuer. and no representation or warranty. served as manager or co-manager of a public offering of securities for. Copyright © 2011 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd. transmitted to. England. CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker. country or other jurisdiction where such distribution. Any services CS provides to municipalities are not viewed as “advice” within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Recipients who are not market professional or institutional investor clients of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. In addition. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. initial capital paid to make the investment may be used as part of that income yield. CS accepts no liability for loss arising from the use of the material presented in this report. and elsewhere in the world by the relevant authorised affiliate of the above. without the prior express written permission of CS. nor any copy of it. certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was. opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. or effect transactions. Those reports reflect the different assumptions. This report is not to be relied upon in substitution for the exercise of independent judgment.S. in Mexico by Banco Credit Suisse (México). state. market conditions and volatility. between any municipality (including the officials. CS may have. In addition. or otherwise constitutes a personal recommendation to you. please use the following link: https://www. municipal advisor. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. you will be requested to pay purchase price only. This research may not conform to Canadian disclosure requirements. significant advice or investment services in relation to the investment concerned or a related investment. U. except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. express or implied. Information. and/or have a position or holding. in Brazil by Banco de Investimentos Credit Suisse (Brasil) S. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. or an associate of CS or CS may be the only market maker in such investments.S. available on request. CS may have issued. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. within the last three years.Disclosure Appendix Analyst Certification I. CS will not treat recipients of this report as its customers by virtue of their receiving this report. in such circumstances. Please note in particular that the bases and levels of taxation may change. One Cabot Square.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation). perform services for or solicit business from such issuers. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Credit Suisse Securities (Malaysia) Sdn Bhd. Except to the extent to which the report refers to website material of CS. management. copied or distributed to any other party.