In reports of China's looming debt crisis, it's common to see references to the "shadow finance" or "shadow banking" system, but it's not always clear what these terms mean.
One concrete -- and growing -- example of the shadow banking system is the Chinese "pawn-shop" industry, who have $43B in outstanding loans, mostly made to business-owners for working capital, and largely secured by real-estate holdings. These are essentially payday loans for businesses, and come with exorbitant interest rates.
While $43B is a drop in the bucket of China's shadow banking sector, which is estimated to comprise $9T in transactions, the pawn industry is growing like crazy, possibly as a result of state crackdowns on other forms of shadow finance. The industry has doubled in size since 2010, and the average loan is about $26K -- meaning that these "pawn brokers" have issued loans to millions of borrowers.
The pawn brokers themselves are borrowing from mainstream financial institutions, creating a hard-to-quantify, largely invisible source of systemic risk to the Chinese banking system. The state regulators are expected to publish new, stricter guidelines for this lending, and for insurance underwriting of pawn brokers.
My guess is that this will only create new shadow finance firms. China's growth has been fueled by easy credit (and stock bubbles) and the alternative to shadow finance is default, and people will go to extraordinary lengths to avoid defaulting.
A typical loan in Shanghai comes with an interest rate of about 2 percent a month, or 24 percent annually, compared with the benchmark one-year lending rate of 4.35 percent. Pawn shops will typically lend up to 40 percent of the value of an apartment pledged as collateral, renewing the loan every six months.
A recent court case in Beijing showed how large such sums can get. The dispute involved a three-month, 4.35 million yuan ($648,000) property-backed loan with a 30 percent annualized interest rate. The borrower ultimately defaulted.
China Scrutinizes $43 Billion Pawn-Shop Lending Boom [Bloomberg News]
In 2013, the UK coalition government of David Cameron's Tories and the Libdems' Nick Clegg launched a "Help to Buy" scheme that gave incredibly cheap, taxpayer subsidised loans to first-time homebuyers, who got their money interest free for five years and thereafter had to repay it at 1.75% interest.
The Great State of Maine, having jettisoned its far-right lunatic "government" and replaced it with a responsive, progressive, evidence-based one, is now set to pass the nation's most stringent ISP privacy law, going further than both New York and California.
In 2012, Facebook settled an FTC privacy investigation by promising a host of privacy protections (that they never delivered on); now, the FTC is probing Facebook's noncompliance and they've demanded that the company let them look at Zuck's email, which prompted the company's legal team to have a look therein, and they really didn't like […]
Whether you’re an artist, designer or just organizing a photo album, photo editing software is a must. And software designers know it: Platforms like Photoshop and Lightroom have a ton of helpful features, but you’ll pay for them in spades. Luckily, there’s some competition in the photo editing arena. Right now, Skylum’s Luminar software is […]
Who needs a holiday sale? Sometimes there’s no better time than the thick of summer to find deals. We should know – we’ve found ten deep discounts on some must-have items. Whether you’re searching for CBD edibles, exercise gear, chargers or other tech, take a look. But don’t look long – these prices aren’t likely […]
Heading abroad? Even if it’s just a short trip, there’s a lot to prepare for. Travel can be incredibly rewarding, but it can tricky to navigate different cultures and lodging arrangements – and even trickier to do it cheaply. Before you go shopping for suitcases, here’s our pick for a good first investment: The Ultimate […]