Booming shadow banks undermine the economy
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Shanghai Daily, October 31, 2011
Therefore, should they stop relying on shadow banks for high-interest loans, these banks will collapse since legal banks' interest rate is in fact negative - meaning inflation outpaces benefits accruing from depositors' bank savings.
Businesses that didn't make the leap into the capital market have bided their time in the hope that an industrial spring will arrive one day. But their talent pool is shallow, and they don't have deep pockets. So an industrial spring is still just a dream.
Even though they may have many orders to fill, they decide to hunker down in the face of soaring labor costs, a shortage of skilled labor, and escalating trade frictions - rather than take a shot at their ambition.
A direct result of the central bank's tightening measures is the rocketing interest rate charged on loans. The new loan sharks thus can earn big money in a short period of time, even accumulating the equivalent of a year's operation of their former legitimate business.
Polluting as ever
Under such circumstances, some regions or firms ill-suited to develop renewable energies have eagerly done just that, in pursuit of cheap state loans and support. Foreigners are well aware of this and they have outsourced their production work, which is not in any sense clean, to China where they have benefited from low prices due to fierce local competition.
Now we realize the large hidden costs, but it's too late. Moreover, recently the alarm has been raised about the overproduction in this sector. Small companies are nominally engaged in a clean energy revolution and think they have finally achieved high added value, but as a matter of fact they have not. They have yet to transcend their traditional role of sub-contractors and suppliers of cheap goods and services.
The homogenizing trend in tapping green technologies has led to an excess of state subsidies being poured into risky enterprises and the so-called "new economy," rather than into industries that have a competitive edge and are hungry for funds.
The latest round of inflation is born of rising costs. Many companies with their footing in the real economy feel the pinch and because of a herd mentality and a desire to distribute risks, they have tentatively placed some money on the gambling table of the capital casino, which contributes to the "cash famine" besetting the real economy.
To solve the problem of "cash famine" and "cash glut," I proffer some policy recommendations in hopes that relevant authorities might draw on them and implement a raft of schemes that work better than credit tightening alone.
Solutions
First, achieving high added value is our long-term goal but now China is seriously lacking in talent, capital and financial sophistication.
So putting all the eggs in a single basket of incubating green technologies only wastes resources and engenders vicious competition. In fact, some enterprises are capable of achieving high added value but they are discriminated against by regional policies. We should reduce their tax burden and logistics costs and give them equal opportunities to compete.
Second, we need to beef up supervision to prevent the financial sector from sucking industry dry of its fuel. Otherwise serious stagflation will emerge. In the meantime, full government support for businesses that don't dally with shadow credit will help reinvigorate their growth and offset the spillover effect of "negative" interest rate.
Third, we need to craft better institutional responses to the problem of sloshing liquidity. To do so entails tax incentives and the expertise of financial professionals to channel excessive capital from finance to the real economy. However, there's a caveat. It was the immoral practices of financial wizards, coupled with systematic opaqueness, that created the US sub-prime mortgage fiasco.
So when we seek the help of financial professionals in managing idle capital, it is necessary to strengthen oversight because their irregularities are deadlier than ill-considered investments by retail investors. Financial maturity is central to the success of China's economic transition.
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