Wenzhou private interest rates hit 96%

温州民间利率触及96%巅峰 民营金融期待破冰

A story I've been trying to find information on is the one about "loan sharks" in China. These aren't loan sharks as in the West, they're more like grey market savings pools. This is found in Asian countries beyond China and immigrants have brought the practice abroad. It has also been used by other immigrant communities that do not have access to the banking system.

The way it sometimes works is people will put in a set amount each year, and each year one person takes the pot. They then repay the loan over time. It's an old tradition and even today in China, consumer credit is hard to obtain from the banking system.

Medical, housing and educational expenses were probably the largest destination for these funds. For housing, that usually meant the down payment for a child's first home, but now these pools are being used to fuel real estate development.

I saw a short video about this last week from Peter Navarro, but I couldn't find the proper Chinese term for this phenomena and the people discussing this have only referred to "sources in China." Considering it is supposedly a widespread financing method, I'm skeptical if there's not at least forum and blog postings discussing some aspects of it.

Mish Shedlock picked up on the story today in Ponzi "Shark Loans" Fuel China's Housing Bubble; Home Sales Plunge 44% in Xiamen; Bubble Busts in Tianjin. He has some anecdotal evidence from his own contacts, but he also links to a blog with extensive coverage.

Israel's Financial Expert covers the story in: Special Report- The Secret Engine Behind China’s Housing Bubble- The Ponzi Shark Loan Finance

Very simply, here's how this is working. Chinese are using mortgage equity withdrawal (MEW) to borrow at low interest rates and they are lending to "loan sharks" who make loans to real estate developers. The interest rates on these loans can run from 20% to triple digits, according to sources. This pushes real estate prices higher, which allows for more borrowing by homeowners, lending to sharks, etc. A "virtuous cycle" that of course grows into a very unbalanced situation, just as MEW fueled the U.S. housing bubble.

I stumbled across this article when looking for more information. All translations by Google Translate.

温州民间利率触及96%巅峰 民营金融期待破冰
Wenzhou private interest rates hit 96% at the peak look forward to ice-breaking

其实，这种情况在已不是头一回。温州上一次掀起民间信贷高潮是在2007年下半年，当时房地产成为温州人最狂热的投资领域，但时值银根紧缩，民间借贷变得异常高涨，借贷利率不断飙升，也使非法融资的活动大行其道，担保公司成为此中的一种重要渠道。

In fact, this situation is not the first time. Wenzhou climax of the last wave of civil credit is in the second half of 2007, when real estate became the most fanatical Wenzhou investment, but a time when money crunch, borrowing is unusually high, and lending rates soaring, also illegal financing activities popular, the security company to become an important channel for herein.

China has flooded the economy with credit, but private interest rates are 11% per month. The last time rates peaked this high was at the top of the real estate market in 2007.

I kept digging and found this on the Currency War blog.

万亿流动性蒸发谜局：谁劫走了人民币
Evaporation of trillions of liquidity puzzle: Who stole the renminbi?

The article discusses the possibility that hot money is no longer flowing into China because of the growing yuan business in Hong Kong.

Something I've covered is the case for the weaker yuan, two such posts are here and here.

China Currency Reserves Increase Least in 11 Years

Capital outflows may have amounted to $51 billion in May and $21 billion in June, reflecting pessimism among international investors about the outlook for China’s equity and property markets and low expectations for yuan appreciation, according to Orlik.

Morgan Stanley’s Wang estimates hot money outflows amounted to about $41.6 billion in May and $4.2 billion in June.

China’s benchmark stock index has dropped 25 percent this year, and government policies to crack down on real-estate speculation led to a slump of as much as 70 percent in housing transactions in some cities.

I don't know how they calculate outflows and that's important.

Did China experiencing January hot money outflows?

In the above article, Michael Pettis discusses what could be the reason for a decline in reserves, other than hot money.

There may be nothing tying these stories together—I found the stories I was looking for and perhaps this is just confirmation bias. I think each story tells us something in and of itself, but there may not be a larger thread to them other than a housing bubble, as Mish covers at the end of his post.

However, if these stories are linked, then this has the potential for a major credit crunch in China that could touch off round two of global deflation. Here's how China's M0, M1 and M2 money supply shape up through June:


And here's a look at the month-to-month change in forex reserves that has some folks worried:

The next few months will bear close watching.