A Visualization of China’s Bubble Economy

Glossary and References


China’s Shark Loan Ponzi Finance-

This is how this Ponzi scheme works:

Local governmental officials that are demanded from the government to produce double digit GDP growth numbers give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurisdiction. Some of them are active partners in shark loan businesses. For example, a party secretary of legal affairs, that controls the public security bureau, which is a court and prosecutor division of government in Yanking city, in She Kiang province tired to run abroad using a passport in 2009 after he found out he can’t repay 60million Yuan. Every scheme has a ring leader whose job is to collect money from all the participants in the ponzi scheme. When some of these ponzi schemes blow up, the party leaders always get bailed out first, and some even ask local business owners to lend them money, and then bail out their own personal fund. After that the ring leader turns himself in and gets protection from the local government.

Most of the funds that are collected in this classic ponzi finance go to local land purchases and real estate development. Part of the funds are used in order to pay back the rolling loan. The short term interest rate in this black market is very high and ranges between 20%-150% annual rate. The sources of the ponzi funds are diverse, as ordinary citizens, banks with corrupted bank officials, and state enterprises play the game.


China’s Inter-Company Ponzi Lending

In the income statements of many public firms, there is an item called "investment income". Those who have experience in China's A share market know that investment income is often considerably larger than regular business income. The interest rate income from these kinds of "trust loans" is classified as investment income.
The "trust loans", which are also called "custodian loans", are different from the bank trust investment products. Bank trust investment products are loans that are repackaged by the banks and sold as trust products. (Much like they American CDO's and MBS's). The issue of bank trust investment products has already received public exposure through a report by Fitch.

Although the "inter-company trust loans" phenomenon has never gotten public exposure through major news sources; this kind of borrowing is very popular among big, medium and small Chinese firms, and is used in a much larger scale than the "bank trust investment products".
These are off balance sheet loans, and no research has been done on the scale of these high interest rate loans. Nor has any official figure been published. (With an average rate of 15%, it is three times the Bank of China's official rate).

Close to 90% Of China's SOE's, including those in sectors like Telecommunication, oil, steel, tobacco, education and consumer good have real estate subsidiaries. Companies like that use the parent SOE to borrow at low interest rates from the bank, and then lend the money to the real estate subsidiary. Beside that, they also lend money to other real estate developers that they have no connection with.

1/3 of China listed firms made official announcements regarding participation in "trust loan" business. This figure is probably an underestimation, since many public firms will avoid public exposure due to the negative reputation of such loans.



China’s Investment “Trust” Products Finance

A new report came out of Fitch Yesterday, stating that Informal Securitization is increasingly distorting credit Data, and has been under representing the actual amount of new loans in the first half of 2010: "Adjusted for informal securitization activity, Fitch estimates that the net amount of new CNY loans extended in H110 was closer to CNY5.9trn, or 28% above the official figure of CNY4.6trn...

So what exactly is Fitch referring to when mentioning “Informal Securitization”?

The trust products that Fitch is referring to are investment products that are sold by the banks, and packaged by the trust companies. There are two kinds of trust products, the first being products that are sold by the bank to local investors and represent loan that the bank has made directly to homebuyers. In fact, a lot China’s local government debt were packaged in as well. Up until two years ago most of the products were of this nature.



The End of The Yuan Peg- China is Desperately Trying to Attract Foreign Capital in Order to Prevent a Banking Crisis

Investors worldwide are making large bets that the Yuan will revalue and gain value versus the U.S dollar. Ironically, this intensifies the potential of a Yuan crash, since the presence of so much speculative funds is going to overweight China’s foreign exchange reserves. If China decides to let the Yuan float, it may go up initially but once foreign investors take the money out of the country once the revaluation has been done, the flow of capital will drain China holding of FX reserves since it will need to sell them in order to prevent a Yuan collapse


Read 50 Facts About China’s Bubble Economy


Watch videos of coverage in the Chinese Media

Read the amazing story of a man who had to sell his kidney to pay a loan shark


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