Kellee Tsai, who wrote an invaluable book on the informal banking sector in China (Back-Alley Banking, Cornell University Press, 2004), responded to the Economist article with this:
While it may be true that the funds in the particular Shenzhen-based bank discussed in the article were primarily being used for speculative investments, I do not agree with the assessment in the second to last paragraph, "As much as 90% of [the money in these banks] is used for speculative trades in financial markets."
The allocation of funds varies considerably by locality. It is not surprising to hear that the large (busted) underground banks based in Shanghai and Shenzhen were focused towards the real estate and equity markets, but in most of rural and urban China, underground banks and moneylenders are simply brokering funds between savers seeking higher returns and individual borrowers who need capital to run their businesses. Occasionally these arrangements degenerate into ponzi schemes or get distorted by bad (OK, "speculative") investments, which generates substantial local press coverage and a short-term wave of regulatory crackdowns.
But I have found that most informal financial institutions are remarkably well run because they face hard budget constraints and their owners are quite saavy in making sound credit decisions. Finally, for conceptual and typological clarity, I wish the article had distinguished between illegal investment funds and underground banks serving SMEs. There are many different types of informal finance.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (1) for "Illegal banks (3)"
January, 2008
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