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Thursday, September 13, 2012 3:07 AM


China's Shadow Banking System Collapses Exposing Numerous Ponzi Schemes; Implosion Reaches Critical Mass


A collapse of property schemes, commodity schemes, and other investments schemes in China is well underway. The Ponzi schemes all had one thing in common: they needed an ever-growing pool of suckers to pay the returns promised to investors.

Well, the pool of greater fools finally ran out, and Shadow Bankers Vanished Leaving China Victims Seeing Scams

China’s slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments. The slowdown also is putting pressure on the government to rein in private lending to avoid a spate of defaults that could increase the number of victims and lead to social unrest.

Suicide, Bankruptcy

The shadow bankers are now disappearing, committing suicide or reneging on agreements, leaving thousands of victims in their wake. In the first half of the year, more than 58,000 lawsuits involving disputes over 28.4 billion yuan in private lending were filed in Zhejiang province, where Wenzhou is located, up 27 percent from the same period in 2011 and the most in five years, according to the provincial supreme court. One-fifth of the cases were in Wenzhou, where authorities have set up a special court to handle the surge.

Private-lending victims nationwide filed more than 600,000 lawsuits valued at 110 billion yuan in 2011, an increase of 38 percent from the previous year. In the first half of 2012, the number of filings rose 25 percent to 376,000, according to People’s Court, a newspaper run by China’s Supreme Court.

In Wenzhou, an export hub where almost 90 percent of families have taken part in underground lending, more than 100 people have fled, committed suicide or declared bankruptcy since August 2011, and at least 800 lending brokers have gone bankrupt, Xinhua News Agency reported in May. Home prices there declined 16 percent in July compared with a year earlier, the fifth consecutive monthly decline, according to the National Bureau of Statistics of China.

Banks also are feeling the pinch. The industry’s nonperforming loans increased for three consecutive quarters through June to 456.4 billion yuan, the longest streak of deterioration in eight years, according to the China Banking Regulatory Commission.

Loans overdue more than one day jumped 27 percent in the first half at the nation’s five largest lenders, including Industrial & Commercial Bank of China Ltd., the country’s biggest, and Bank of Communications Co., according to data compiled by Bloomberg based on semi-annual earnings statements.
Implosion Reaches Critical Mass

China's shadow banking is not a new topic, and the implosion now appears to have reached critical mass. Here are a few more Bloomberg articles.

China Shadow Bankers Go Online as Peer-to-Peer Sites Boom

China Slowdown Stymies Plan to Curb Shadow-Banking Risks

China’s Top Court Suspends Death Sentence for ‘Rich Sister’ Wu

Shadow Banks on Trial as China’s Rich Sister Faces Death

China Credit Squeeze Prompts Suicides

China to ‘Strictly Control’ Shadow Banking Risks, Liu Says

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Mike "Mish" Shedlock
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