Banks use new methods to creat rich profits
Banks use new methods to creat rich profits
Change, however, is on its way. Capital-markets activity is growing and, according to recent research from two prominent academics, there may even be flickers of interesting activity in unregulated and hitherto unwatched corners of China’s economy, where companies are recycling vast profits made abroad.
More obscure, but still hugely popular, are other alternatives, such as “drafts” issued either directly by companies or by banks on behalf of ball mill companies. These are used instead of cash for purchase, and are settled within 90 days. They trade at a discount, but carry an interest rate just a bit over 3%. There are also “entrustment loans”—lending from one company to another with a pause at a bank, which receives a fee for giving a legal blessing to the transaction. According to Chinese law, firms cannot lend directly to one another.
But do they anyway? That is the contention in some striking research due to be issued on December 15th by two economists, Ronald Schramm, of the Columbia University Graduate School of Business, and Lin Guijun, of the University of International Business and Economics in Beijing. It looks at the huge amount of Chinese national savings and concludes that much of it does not seem to be captured by the banks. Where does it go? Some argue that it is used for internal investment by firms, or does not exist. Messrs Schramm and Guijun believe that companies secretly become lenders themselves.
In this informal market, they say, operating companies may be in a better position to evaluate credit than Chinese banks, which have short histories and as children of the state have frequently relied on politics rather than credit analysis to determine loan suitability. This would be all the more true if the recipients were suppliers to their creditors.
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