The Rupp Report: Underground Banking

Jürg Rupp, Executive Editor

In modern times, everybody knows the term “guerilla marketing.” But do you know the expression “ underground banking”? With this kind of money-borrowing, the Chinese people once again show their ability to adapt to any kind of problem and to survive in every situation.

Money Restrictions
The wind is changing in the Chinese economy. The government wants to slow down the double-digit growth of the gross national product economy below to 9 percent. And the People’s Bank of China in Beijing is more restrictive in lending money than it was in the past. Not only does the textile industry see problems in the financing of new projects such as investments. High energy expenses and raw material prices are just a part of the rising costs in China. So many small and medium-sized enterprises (SMEs) feel that a strong wind is blowing. They need money to survive and don’t get a loan that easily anymore. In fact, they don’t get a loan at all. So, what’s the solution? Underground banking. And this is the way it goes:

No Cash
You are a small enterprise with some shortage of cash flow. Now, tell some of your good friends about your problems. And don’t forget to tell them that you are willing and able to pay the money back. A few days later somebody will call you and will lend you the money for fixed conditions. You will meet the person and get the money in cash. With this loan, your business can survive, and then you pay the money back.

Important Sums
In 2007, an official report from the Chinese government estimated illegal banking to be — in official terms — up to the sum of 810 billion renminbi, which is approximately $120 billion. For SMEs, the market share is 28 percent. Sometimes, the illegal bankers are just wealthy people who lend money to their friends. But in most of the cases, these clandestine bankers are very well-organized and sometimes provide better services than the official state bank, and, believe it or not, a higher interest rate for your own savings.

Since the opening of the Chinese economy in 1978, underground banking has played an important role for privately owned companies. At the turn of the millennium, there were already more than 30 million SMEs, but only 1-percent “official money” was borrowed from the private sector. The underground banking system is a network all over mainland China; it organizes money for everybody. According to another report, even a state-owned company called upon the services of the underground banking system. Among Chinese experts, there is an ongoing dispute as to whether these illegal transactions are an advantage or a disadvantage for the people.

Rigid Capital Control System
But now, the wind is blowing even more stiffly. Since the beginning of this month, the Chinese foreign currency authority has sharpened its capital control system. Since the renminbi has increased its value compared to the US dollar, billions and billions have poured into the country, and most of the money didn’t get used the official way. Exporters have to park their money in special accounts under control by the government. However, some experts believe that in the long run, the country must liberate its extreme money regiment, and that some underground banks will become legal.

At the end of the day, the situation will improve. The government knows it can’t solve the problem by closing down the banks, and it will give some licenses for private banking. On the other hand, underground banking is proof that Chinese people especially know how to survive and that a flexible human brain will always find a way against all odds.

July 15, 2008