Chinese government powerless vis-à-vis failing shadow banks

Fearing regulations, hundreds of shadow banks declare bankruptcy or their bosses disappear with the cash. Some of the lending institutions promised returns of up to 20 per cent.

Shanghai (AsiaNews/Agencies) – In recent months, hundreds of shadow banks have failed, leaving thousands of clients penniless after investing their savings.

Shadow banks operate outside the official banking system and connect small and medium-sized businesses to potential lenders, promising the latter returns of up to 10-20 per cent on the invested capital.

Shadow banks have flourished in China in recent years, favoured by the ease with which official banks loaned money to save the country from the global economic crisis and by the reticence of official banks to lend to small and medium-sized businesses.

The Internet was the linchpin between small and medium businesses and companies or individuals who lent money.

The sector grew so much that it has come to involve at least 50 million customers with a turnover of more than 1,300 billion yuan (US$ 189 billion).

According to Moody's, shadow banking assets as a share of China’s gross domestic product dropped to 73 per cent at the end of June from a peak of 87 per cent in late 2016.

Fearful that the national debt might grow even further, the government began to warn the population against returns that were too good to be true. However, back in 2014, Prime Minister Li Keqiang had praised this way of financing small and medium-sized businesses.

For years in fact, the government has allowed this sector to expand without monitoring it and only now it is trying to regulate it.

Alarmed that the state could begin to regulate shadow banks, many of them have declared bankruptcy and their directors have disappeared with the cash.

According to industry data provider Wangdaizhijia, at least 165 online lending platforms were unable to repay their clients or went belly up by last July.

Several attempts to organise those who suffered losses in order to put pressure on the authorities have been stopped by the police.

According to French daily Le Monde, in July and August, several hundred of those who lost all their savings met in Shanghai and Beijing.

But, after blocking messaging platforms for people to keep in touch, the police arrested some of them and warned everyone not to protest in the streets. So far, no shadow bank director has been arrested.

• china
• economy
• finance shadow banks
• loans
• subprime crisis
• gdp
• domestic debt