China: shadow finance for the masses

“The rise of the shadow banking system (in China) is almost an inevitable reaction to financial repression,” argues Gabriel Stein, chief economic adviser to the Official Monetary and Financial Institutions Forum.  The Chinese save too much because they feel the benefits of investing are non-existent or insufficient. And this in turn contributes to the detriment of the economy. “People suddenly finds out there’s money to be made by offering higher returns at the cost of the instability of the financial system,” reckons Stein.

And as the long-anticipated economic and political reforms are yet to be implemented, this financial survival instinct is spreading like wildfire among avid Chinese netizens. At the end of last year, 43.03 million people already enjoyed the advantageous financial products offered by Yu’e Bao. Last year, the leading Chinese Internet payment platform Alipay (operated by China’s e-commerce giant Alibaba) launched the online investment platform to offer its users the possibility of investing the idle money on their Alipay accounts and getting much higher benefits than any traditional bank. Not surprisingly the Chinese embraced en masse this type of online wealth management products.

For decades, the government intentionally kept interests rates at very low levels to transfer resources to the corporate and government sector. However, the tight control of capital accounts has pushed the world’s second-largest economy to a financial deadlock.

“Essentially as a Chinese saver you don’t have many options. You can put your money in the bank, this is what you get, you can put your money in the stock market it is a highly volatile casino, or if you have enough money to put it into real state”, explains Stein.

Things are moving fast. Yu’E Bao’s deposits already reached 400 billion yuan (65.96 billion dollar). And it’s first investment planned was sold out just 6 minutes after its launch, reaching a total of 880 million yuan worth of wealth management products.

According to Alibaba, a lack of actual options causes that Chinese consumers have reservations when it comes to their investment decisions. Consequently in 2012, Alibaba endowed their ecommerce C2C, Taobao, of a new wealth management portal site. The platform Licai will give Chinese financial institutions a channel to sell their products throughout the country via the Internet.

The opportunities are huge. And major Chinese Internet companies are following the footsteps of Alibaba attracted by the potential of this business model that can be applied to any field of e-commerce.

Conversely, China’s central bank doesn’t seem so convinced and it’s betting on the regularization of these online investment platforms. According to economic site Caixin, the Central Bank’s biggest fear is the opacity of these economic transactions, because they take place in a separate system and therefore they can’t be properly monitored. But some experts point out that the motives behind the recommendations of influential Chinese banking institutions would obey to their opposition to the liberalization of a sector they comfortably control.

The inability to monitor this type of economic transactions is precisely the greatest fear of the Chinese authorities at a time when there is an evident need to urgently liberalize capital controls.

Chinese growth model has been extremely powerful, but ultimately it’s a dead end. Exports dependent on demand from outside. Liberalizing capital controls, move away from this model”, adds Stein.

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