Word: zhejiang
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...most common source of funding in Zhejiang comes from investment pools, called hui, run by people like Xu Shoucong. This past March, Xu's family organized 17 people to create a fund that rotates credit to all participants, who use the cash for anything from weddings to starting small businesses. Huis loosely resemble microfinance schemes of the kind made famous by the Grameen Bank in Bangladesh, and millions of people participate in Zhejiang and neighboring Fujian province. Because the pressure to repay derives from social networks that are as strong as rebar in Confucian China, borrowers rarely default...
...course, the government must guard against Ponzi schemes and pyramid scams. On occasion, several huis will pool their money, and one failure will lead to a series of them. In September last year, just such a structure collapsed in Zhejiang's Fenghua city, according to Oriental Outlook magazine, and the hui leaders were forced to flee...
...These mass withdrawals pose a direct, albeit somewhat nebulous, threat to China's legitimate (but often poorly managed) lenders, which are burdened by bad loans to state enterprises and depend heavily on the deposits of ordinary Chinese to remain solvent. If the rest of the country follows Zhejiang's example, the deposit exodus could shake confidence in the entire system, sparking bank runs and a financial crisis. Arthur Kroeber, managing editor of the Beijing-based China Economic Quarterly, says the main reason the government increased interest rates last month by 0.27% for one-year loans and deposits?China's first...
...hasn't happened for the simple reason that the gray-market provides an efficient means of capital allocation in ways the country's socialist-era financial system cannot. The People's Bank of China, the central bank, discovered this recently when it started monitoring gray-market capital flows in Zhejiang. Expecting to find shadow bankers charging exorbitant rates, they instead discovered that underground interest rates were only marginally higher than what banks offer and repayment terms were better. This steady source of finance has given Zhejiang not only China's most vibrant private economy but also the lowest level...
...whole, the government has turned a benevolent eye toward illicit finance. Cracking down would be "like taking seed grain away from farmers," says Beijing University's Shen. Gray-market lending is even providing inspiration for a new generation of would-be private bankers. A group of scholars at Zhejiang's Communist Party School, a training ground for cadres, are proposing to "establish legal private banks" along the lines of underground institutions, according to one of the professors who helped draft the proposal...