Developers turn to shadow banks as Chinese property market slows
The city, which is referred to as a "ghost town" due to its lack of people, is being built to house 1.5 million inhabitants. Locals have dubbed it the "Dubai of China". photograph: mark ralston/getty images
Empty apartment buildings in the city of Ordos, Inner Mongolia
Ghostly skeletons of large residential estates, half-finished shopping malls, empty apartment buildings with no windows, serviced by dirt tracks full of potholes. Sound familiar?
These images of half-built luxury ghost developments are known to Irish readers, but they are relatively new in China, where the property market has slowed significantly since the government introduced cooling measures to stop the boom turning into a bubble.
In places like Ordos in Inner Mongolia, hundreds of projects have ground to a halt after a building boom fuelled by over-investment went bust, leaving tens of thousands of investors at risk of default.
In the search for options that offer more than the minimal return of a bank deposit book, investors in China have been piling into investment vehicles known as trusts, which promise high annual interest rates and a return of principal for people with more than a million yuan (€120,000) to invest.
According to Wang Tao, chief China analyst at UBS, trusts account for more than a quarter of the country’s estimated $3.35 trillion (€2.56 trillion) in non-bank lending, or about 45 per cent of China’s gross domestic product.
The investment bank Sanford C. Bernstein Co estimates that shadow finance in China totals about 20 trillion yuan (€2.45 trillion), or a third of the current size of the bank lending market.
Shadow banking in China includes banks’ off-balance-sheet vehicles, such as commercial bills and entrusted loans, as well as underground lending by individual. The reason it is booming in China is because more than 90 per cent of the nation’s 42 million small and medium-sized enterprises (SMEs) – find it difficult to get bank loans.
Liquidity risk
Xiao Gang, management board chairman of Bank of China, warned in a recent editorial in the China Daily how China’s shadow banking is contributing to a growing liquidity risk in the financial markets.
Trust companies were run in a manner that was “fundamentally a Ponzi scheme”, Xiao said. “China’s shadow banking system is complex, with a close yet opaque relationship to the regular banking system and the real economy. It must be tackled with care and sufficient flexibility, but it must be tackled nonetheless.” He added: “Regular banking and shadow banking are not isolated from each other. Many activities in the two systems feed into each other and could influence each other if things start to deteriorate.”
An Ordos developer spoke anonymously to The Irish Times. Mr Li, about 37, started out as coal mine operator before moving into land speculation and property development in 2004, quickly becoming one of the biggest developers in the region.
