Informal banking system remains the lifeblood of entrepreneurial China; Naturally, statists want to stamp it out

Chinese regulators have no idea how to control private lending.

HUANG WEIJIAN says he is not an underground banker or even a private banker. Normal bankers make money from interest payments and lose money at times of financial crisis. But Huang makes his biggest profits when borrowers go bust.

"We are Wenzhou's first true venture capital company," he says, sprawling on his office couch, with his neon blue skivvy and designer jeans shining through the fog from his cigarette.

"What we do is put money into banks and let the banks lend to companies," says Huang, who intends to invest a billion yuan ($226 million) this year. "If they repay the loan in time, that's fine, but if they don't, we acquire them. We target companies that are about to go bankrupt but still have a good economic foundation - we like firms to run out of money so they become ours."

In all its infinitely variety, and despite 20 years of sporadic Communist Party campaigns to stamp it out, the informal banking system remains the lifeblood of entrepreneurial China.

While the state-controlled banks tend to confine their lending to state-controlled firms and friends of the local Communist Party secretary, informal creditors take great risks to supply credit to small businesses that deserve it.

Chinese regulators and analysts are mostly confident that the state-controlled banks are strong enough to withstand the global financial crisis. But they are sweating over informal banks, which they can't see. They know informal money has pumped up the share and housing markets and also the "unexplained capital flows" column of China's balance of payments data, but they have no idea how to quantify or control control it.

"Private banking is often enforced by standover men," says Zhu Qiren, director of Peking University's prestigious China Centre for Economic Research. "A lot of that money didn't go towards production. It went into the sharemarket, pushing the index from 1000 to 6000. That is the problem."

More precisely, many regulators and analysts believe the collapse of the share and property markets might imply that private lenders are in trouble, posing a major threat to the Chinese financial system.

But in Wenzhou, the centre of what is probably the world's largest informal finance network, it seems the private lenders are more than capable of looking after themselves.

Wenzhou's webs of private lending are held together by a gentleman's code. Borrowers are introduced and implicitly guaranteed by friends and relatives.

LNK

Informal banking system remains the lifeblood of entrepreneurial China; Naturally, statists want to stamp it out

Informal banking system remains the lifeblood of entrepreneurial China; Naturally, statists want to stamp it out

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